Accounting Project Topics

Adoption of International Financial Reporting Standards and Earnings Management in Quoted Manufacturing Companies in Nigeria

Adoption of International Financial Reporting Standards and Earnings Management in Quoted Manufacturing Companies in Nigeria

Adoption of International Financial Reporting Standards and Earnings Management in Quoted Manufacturing Companies in Nigeria

Chapter One


The main objective of this study is to investigate the impact of IFRS adoption on earnings management in quoted manufacturing companies in Nigeria. Specifically, the study is aimed at achieving the following; to:

  1. determine the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria.
  2. examine the relationship between earnings management and performance of quoted manufacturing companies in Nigeria before and after the adoption of IFRS.




Accounting quality

Despite the fact that accounting quality is a concept to which many research papers refer, there is no uniform definition of what accounting quality exactly comprises. Barth et al. (2008) define accounting quality as the ability of accounting measures to reflect the economic position and performance of a firm. According to Verleun, Georgakopoulos, Sotiropoulos, & Vasileiou (2011) this definition draws our attention mainly to the relevance of the financial information provided. Penman and Zhang (2002); Watts (2003) as cited in Verleun et al. emphasized that other definitions of accounting quality focus more on the reliability of financial information; according to this definition higher quality accounting information should benefit investors and other stakeholders by protecting them against opportunistic behavior of management. According to Verleun et al (2011) this sharp division between the different accounting quality definitions exposes one of the inherent problems which is common with the reporting of financial information, which is that if a financial report is reliable to some extent it might not be relevant vice versa. Verleun et al (2011) stated that this trade-off is also something that we see when we are measuring accounting quality since some measures focus more on relevance where others focus more on reliability. Verleun et al (2011) admit that while these concepts for sure sound contradictory this does not automatically mean that an increase in relevance cannot be equal to an increase in reliability. The definition provided above states that accounting quality applies to both the financial position and performance of a firm. Thus accounting quality affects both the statement of financial position and the profit or loss statement. So this probably means that, an increase in the relevance of statement of financial position information comes together with an increase in the reliability of income statement information. Therefore an increase in both relevance and reliability as a natural consequence gives justification for including three measures in the study.

Accounting quality and its attributes

Verleun et al. (2011) stated that the attributes of accounting quality are divided into accounting- based and market-based. According to Verleun et al. (2011) accounting-based attributes are those characteristics of accounting numbers (like understandability, relevance, reliability and comparability) which are influenced only by how you incorporate and determine the book value of line items in the financial statements, i.e., the recognition and measurement principles (Verleun et al., 2011). A high level of accounting-based attributes means that the accounting numbers are reliable i.e., the figures which appear in the financial statement are based on facts and not on the mere wishes of the accountant (ibid.). Verleun et al. (2011) also pointed out that the accounting-based attributes are accruals quality, persistence of earnings, and predictability of earnings and smoothness of earnings. In the opinion of Verleun et al. (2011) the measurement of these four concepts does not refer to any market values and excludes any effects of disclosure quality. It is based on the idea that the function of earnings is to allocate cash flows into the accounting periods using accruals ibid. However, in the words of Verleun

et al., (2011) another function of earnings is to reflect economic income as represented by market returns. According to Verleun et al., (2011) there are three attributes of accounting quality and they are market-based which means that they relate the accounting numbers to the market numbers (returns and/or prices). Verleun et al. (2011) further opined that these are the value relevance of accounting numbers, timeliness and conservatism. The quality of these attributes jointly depends on how financial statements items are incorporated and measured plus their disclosure quality. Again, in the opinion of Verleun et al. (2011) at the end of the day what matters is quality of market-based attributes because they embody the relationship between the accounting numbers and the investors´ perception of the numbers.




This study adopted the cross-sectional field survey [i.e. an examination of companies (or subjects) annual financial reports] of the quasi-experimental research design by examining the interrelationship among a number of variables between pre and post IFRS adoption in Nigeria.. Only firms for which data are available over the entire sample period for all the variables needed to calculate the quality measure are included in the final samples. This study use a number of accounting characteristics suggested by previous research such as Barth et al, 2006. The research focus is on the quality of accounting (financial reporting) before and after the adoption of IFRS in Nigeria. Following previous research, the researchers divided the measures into three groups: earnings management, value relevance and timeliness of loss recognition (Leuz et al., 2003; Lang et al. 2003; Lang et al. 2005).



Descriptive statistics in the form of tables is used in the study to present relevant data.s. In addition, correlation and comparative (difference between groups) data analysis were applied in the research. The relationship between the independent and dependent proxies of accounting quality was determined by Regression analysis and after that a period comparison is carried out using Independent Samples t-test. The hypotheses were tested with Statistical Package for Social Sciences (SPSS) version 20 using Ordinary Least Square (OLS) Regression and Independent Samples T-Test for Equality of means in order to compare the Value Relevance (Adjusted R2) difference between pre- and post-IFRS adoption periods.




The overall results of hypotheses testing suggest that IFRS adoption has not improved accounting quality of listed cement and breweries companies in Nigeria. The investigation showed that: 1) The degree of earnings management has not declined in the post-IFRS period.

2) Earnings and book values are less value relevant in the post-IFRS period compared to the pre-IFRS period. 3) Timely loss recognition is insignificantly larger in the post-IFRS period compared to the pre-IFRS period. The results of this analysis are reported in Table 4.1-7. While George (2008) found a decrease in earnings management in the United Kingdom post IFRS adoption, Zhou et al. (2009) found a decrease in earnings management in Chinese firms and Morais and Curto (2008) found a decrease in earnings management in Portuguese firms, though Elbannan did not find the same thing in Egyptian firms. He attributes his findings to the lack of enforcement by regulators and a lack of training for those preparing and auditing the financial statements. The same issues may be at play in this fellow African country. Given the positive impact of IFRS adoption on other economies, these results suggest that more careful implementation and enforcement of IFRS standards may be required in Nigeria, and perhaps other countries with similar enforcement characteristics. Numerous studies indicate that accounting quality is not determined by accounting standards alone. Accounting quality is also partly determined by the incentive firms have to provide high-quality financial statements. There is evidence that firms’ dependence on external capital increases their incentives to report higher-quality accounting information and to provide more useful financial disclosures (e.g. Francis et al. 2005). Empirical evidence from studies of individual countries also suggests that improvements in financial reporting quality under IFRS occur mainly among firms with greater financial reporting incentives (e.g. Christensen et al., 2008).

In the case of Nigeria, several institutional factors can influence firms’ reporting incentives in relation to the demand for external capital. First, the Nigerian economy is to some extent driven by the manufacturing sector. Firms in this industry are associated with higher growth opportunities and greater competition for external capital than their counterparts in other industries. Thus, if IFRS enables firms to improve financial reporting to entice external investors, this effect would be expected to be greater in the manufacturing sector.. These expected benefits are based on the premise that mandating the use of IFRS increases transparency and improves the quality of financial reporting. However, there is evidence that accounting standards play only a limited role in determining observed reporting quality. The application of accounting standards involves considerable judgment and the use of private information, and as a result, IFRS (like any other set of accounting standards) provide managers with substantial discretion. How far this discretion is used depends on firm-specific characteristics (reporting incentives and operating characteristics) (Burgstahler et al., 2006), and national legal institutions (e.g., Ball et al., 2000, 2003). Table 4.2 reports the results for the significance tests on the differences of the amount of mean discretionary accruals between the pre- and post-IFRS period.

The results for the t-tests, both assuming equal and unequal variances, show that there is no decrease in discretionary accruals and is highly insignificant with p-values being more than 1% for all occurrences. These findings provide convincing evidence that earnings management has not declined after IFRS was adopted. It could however be that either the pre-IFRS observations are so much influenced by other factors not mentioned that they result in a bias in the findings or the post-IFRS period is too small to show any expected results. Data analysis also indicates

that in the post-IFRS period there is almost no difference in value relevance. This could be evidence of an undervaluation of manufacturing firms in the post-IFRS period. The explanation for this is that, ceteris paribus, the market value of firms are to a bigger extent based on intangible assets (e.g. Aboody and Lev, 1998; Kallapur and Kwan, 2004). The recognition principles for intangibles are nevertheless much stricter than for tangible assets within the IFRS. Thus, it would be logical that there is a smaller association between book values and market values.

Table 4.1 represents the first test of Ho1, that IFRS adoption will decrease subsequent earnings management. A significant drop-off in reported earnings post-IFRS adoption would be consistent with a decrease in earnings management as aggressive, earnings-enhancing reporting practices are eliminated or reduced. The results of this test indicate that there is no significant difference in the change in reported earnings post IFRS adoption, but the direction is positive as opposed to the negative coefficient anticipated (p-value <.05). This finding is different from expectation based on Ho1 as previously discussed. A brief discussion of possible factors that could contribute to this finding seems appropriate. These results could potentially be attributable to macroeconomic factors. It may certainly be the case that the post-adoption period in Nigeria yielded better results, on average, across the economy. This is an especially intuitive explanation given the status of Nigeria as a rapidly developing country and economy. Taken together, it seems unlikely that macroeconomic factors are driving this increase in reported earnings post-IFRS adoption. It may also be the case that IFRS is, in fact, less conservative with respect to revenue recognition. Street et al. (1999) study 221 companies claiming to comply with International Accounting Standards (IASs) in 1996. Their findings reveal significant non-compliance with a long list of IASs including “use of LCM for inventories; violation of the all-inclusive requirement for reporting profit/loss and of the strict definition of extraordinary items; failure to capitalize certain development costs; failure to provide all required disclosures for property, plant, and equipment, particularly those associated with revaluations; failure to comply with pension disclosure requirements;for companies operating in hyperinflationary economies, failure to restate foreign entities in accordance with IAS 29; and charging goodwill to reserves or amortizing goodwill over a period in excess of the 20 year limit” (Street et al. 1999). Based on these findings, it seems unlikely that an overabundance of conservatism is behind the increase in reported earnings. In a related note, it may be the case that auditors are more lenient under the new standards, either because their perceived risk is lower, or because auditing the new standards represents implementation problems. Finally, it may be the case that a monetary change or hyperinflation may have caused these differences. Indeed, as reported by Leuz et al. (2003), inflation in Nigeria between 1990 and 1998 (in the pre IFRS adoption period) averaged 10.41% annually. This is roughly consistent with other developing nations such as India, Indonesia and Pakistan. In fact, the stated goal of regulators in the post adoption period was 3 to 6% inflation annually, according to Selassie (2011). It thus seems likely that inflation is a culprit in the surprising results found in table 4.2. Nevertheless, Leuz et al. (2003) do not consider the inflation rates of Nigeria to qualify as hyperinflation, and keep Nigeria data in their tests. Regardless of the cause, these results do not support Ho1. By this measure, the quality of accounting numbers reported in Nigeria remained relatively unchanged before and after IFRS adoption. This is also inconsistent with expectations as described in Ho1. The second measure of accounting quality—value relevance is tested in Table 4.5 Ho2 it showed that earnings and book values are less value relevant in the post-IFRS period compared to the pre-IFRS period while alternative Hypothesis says that post-IFRS adoption, an increase in value relevance should be observed as investors pay more attention to reported values. The dependent variable is the trading price of the firm in period t relative to the reported financial statement items.


The results of this research confirm that the adoption of IFRS does not automatically translate to higher quality accounting. The findings of this research have implication for our understanding of earnings management, value relevance of accounting numbers and timely loss recognition aspect of accounting quality as well as for researcher estimating discretionary accruals, earnings management and earnings quality. It can also be used as evidence to support theory in extrinsic share valuation or financial analysis.


The research goal was to examine whether the quality of accounting (or financial reporting) has increased in Nigeria after the adoption of IFRS in 2012. The researcher’s results suggest that there has been no increase in financial reporting quality over the first two years after the adoption. This study compares the characteristics of accounting amounts using a sample of quoted manufacturing companies reporting under NGAAP during 2009-2011, and IFRS during 2012-2013. Specifically, the researcher investigated whether there is a change in accounting quality during these two time periods. Following prior research, the research uses accounting quality with earnings management, value relevance, and timely loss recognition metrics. Contrary to our expectations, the research results suggest a decrease in accounting quality over the last years. The research shows that earnings and book value of equity are becoming less value relevant during the IFRS period compared to the pre-IFRS period. The findings on earnings management and timely loss recognition corroborate largely our findings with respect to the value relevance of accounting information. The researcher’s results consistently indicate that accounting quality has declined in the first two years. Interestingly enough, the results from this analysis provides stronger evidence that the quality of financial reporting has decreased in Nigeria after the adoption of IFRS. It is of course dangerous to draw conclusions about the quality of financial reporting using this kind of measures. However, as a group they do offer some evidence of the in formativeness of financial reporting and could be a first indication that the adoption of IFRS may have been overwhelming to many Nigeria companies and has not resulted in a more efficient capital market. Although, further research needs to be done overtime and in other sectors in order to corroborate the results of this study using more and more representative data. In summary, it may be that the decrease in accounting quality is mainly driven by institutional factors (such as cost of initial implementation) and not the new adopted standards.


Findings from this study have provided valuable insights that are of interest to practitioners, scholars, investors and policy makers. Certain issues arising from the firms provide avenues for further research agenda as follows: The study considered the influence of IFRS adoption on accounting quality of quoted manufacturing companies. Future research might incorporate the impact of legal tradition on reported accounting quality in a pre- and post-IFRS adoption setting. Furthermore, researchers might study the incidence of earnings management and value relevance of reported values pre- and post -IFRS adoption in a setting in which the previous standards were consistent with GAAP as opposed to IFRS. Further research can extend this study by replicating the methodology to investigate data of companies in the financial sector and other industries.



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