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This study empirically investigates the impact of state agencies and industry regulations on the quality of accounting practice in Nigeria. A two stage approach in which the first stage was complemented by the second stage was adopted in carrying out the study. First, the study adopted a survey approach in which data were collected from users and compilers of accounting information through questionnaire. Secondly, secondary data were collected and analyzed. The data were analyzed and results estimated using students’t-test, Analysis of Variance (ANOVA), Ordinary Least Square Regression as well as Panel Data Estimation technique. For the t-test, the four-year period before and after the enactment of the Nigeria Accounting Standards Board Act, 2003 (1999-2002) and (2004-2007) were compared. The ANOVA was used for the multiple comparisons of the industrial sectors included in the study. Multiple regression analysis was used to analyze the impact of stage agencies and industry regulation as well as the influence of industry attributes on the quality of accounting practice. The panel data estimation was used to enhance the results obtained from the multiple regression analysis. Though results showed that the impact of state agencies and industry regulations was fairly significant and positive for five of the seven agencies and regulations tested, however, significant dysfunctional behaviour was observed in the quality of accounting practice. The findings also showed that the difference in the quality of accounting practice was significantly higher after the NASB, Act 2003 was enacted. Similarly, significant differences were observed among the industrial sectors in terms of quality of accounting practice. The findings further revealed that the size of company and the sign of earnings were the major industry attributes that influence the overall quality of accounting practice. The major implication of the study is that regulations are not enough to ensure that the quality of accounting practice is high in Nigeria. While strengthening existing regulations, it is recommended that emphasis should be focused more on the qualities possessed by those who prepare financial statements and attest to them. This has the potential of reducing dysfunctional behaviour which is prevalent even in the presence of strict regulations and harsh penalties.
Key words: State Agencies, Industry Regulations, Accounting Practice, Industry Attributes, Relevance, Reliability, Comparability
1.1 Background to the Study
The quality of accounting practice is essential to the needs of users who require useful accounting information for investment and other decision making purposes. Accounting information is regarded as useful when it faithfully represents the ‘economic substance’ of an organization in terms of relevance, reliability and comparability (Spiceland, Sepe and Tomassini (2001:36). As observed by Chambers and Penman (1984:32) and Ahmed (2003:18), useful accounting information which derives from qualitative financial statements, help in efficient allocation of resources by “reducing dissemination of asymmetric information and improving pricing of securities.” In an environment of quality accounting practice therefore, there are no deferral of loss recognition, extra reserves are not created and volatility in income is not smoothed away to create an artificial and misleading picture of steady and consistent growth. Therefore, high-quality accounting practice should produce financial statements that report events timely and faithfully in the period in which they occur. This becomes imperative as every individual as well as every organization is concerned about the future (Okwoli, 2001).
However, since the birth of the Association of Accountants of Nigeria in 1960, the reputation of the accounting profession has not been well served with regard to the quality of accounting practice. Though the profession has struggled to develop and maintain acceptable position of independence and integrity in financial reporting and auditing ((Okike, 2004), there has, however been a number of criticisms from various groups who have operational interest in financial reporting, including the World Bank and the International Monetary Fund (IMF).
The most prominent of these criticisms concern the perceived poor institutional weaknesses in regulation, compliance and enforcement of accounting standards and rules. Besides, it is also perceived that there is dearth of professional accountants in the private sector. For instance, the World Bank (2004:4) observes that there are “500,000 registered companies (with 210 listed on the stock exchange) and 17,500 professional accountants in Nigeria.” This position, the World Bank further observes, is a significant disparity even taking into account that not all companies may necessarily need a professional accountant and concludes that when non-qualified persons are employed in accounting positions, it can have “a negative impact on the quality of financial reports.”
The criticisms, according to Okike (2004:705) became even more pronounced due to the “spate of corporate failures witnessed especially, in the financial sector in Nigeria in the mid 1980s to early 1990s following the deregulation of the Nigerian economy.” The incidents further brought accounting practice into sharp focus and consequently evoked an increase in the number of state agencies and legislative control measures many of which have implications for accounting practice. These agencies and regulations are meant to ensure that the nature of information disclosed by firms follows a required standard.
The agencies which have implications for accounting include: the Nigerian Accounting Standards Board (NASB); the Corporate Affairs Commission (CAC); the Central Bank of Nigeria (CBN); the Nigerian Deposit Insurance Corporation (NDIC); Securities and Exchange Commission (SEC); Nigerian Stock Exchange (NSE); National Insurance Commission (NAICOM). Others include the professional accounting bodies--the Institute of Chartered Accountants of Nigeria (ICAN) and the Association of National Accountants of Nigeria (ANAN).
The industry and market regulation instruments include: the Companies and Allied Matters Act, (CAMA), (1990), the Banking and Other Financial Institutions Act, (BOFIA) (1991), Investment and Securities Act, (1999), Securities and Exchange Commission Rules and Regulations (1999), the Insurance Act, (2003) as well as the Nigerian Accounting Standards Boards Act, (2003), among others. These agencies, mostly established by laws and regulations have different provisions which require them to review and approve audited financial statements of some companies before they are published. In some cases, according to Olowo-Okere (2005:10), the agencies and regulators have “differed in their assessments of the quality of financial reporting.”
To address these concerns and ensure high quality accounting practice, the government enacted the NASB Act, in 2003 which seeks to alter the terrain of accounting practice by giving statutory backing to financial reporting standards in Nigeria and made non-compliance of such standards illegal. Thus, the Act altered the mechanism for enforcing compliance with Statements of Accounting Standards (SASs) from persuasion and professional requirement to a legally enforceable regulatory framework. Similarly, the recognized accounting bodies (ICAN and ANAN) introduced a number of measures including the Mandatory Continuing Professional Education (MCPE) as a bold attempt to equip professional accountants with the requisite tools needed to function in today’s dynamic business environment in order to improve the quality of accounting practice.
Although a number of empirical studies have been undertaken into accounting practice and development with particular attention to the quality of accounting practice in developed and newly industrialized economies (Wallace, 1987; Bamber and Schoderbek, 1993; Ng and Tai, 1994; Jaggi and Tsui, 1999 and Ahmed, 2003) to our knowledge however, little information exists on the impact of state agencies and industry regulations on accounting practice in the context of emerging economies (other than Abdullah, 1996 and Owusu-Ansah, 2000). To our knowledge, no such studies have been undertaken in Nigeria. Therefore, this study attempts to contribute to the knowledge base in this area by exploring the impact of the relevant state agencies and industry regulations on the quality of accounting practice in Nigeria.
In order to situate the study in a proper context, the term quality is conceptualized. According to Black (2002:383) quality is “minimum standards designed to ensure satisfaction from a product or service.” Hanson (2007:225), in his perspective sees quality as “a measure of conformance of a product or service to certain specifications of standards.” Following these definitions, quality accounting practice is conceptualized as accounting practices that meet ‘the minimum standards of financial reporting set by government agencies and regulations for the benefit of relevant accounting information stakeholders.’
Following this conceptualization, quality of accounting practice is decomposed into an accounting practice that demonstrates relevance, reliability and comparability. According to Hanson (2007:230), relevance, reliability and comparability are qualities associated with information that is “timely, useful, verifiable, and neutral, has predictive value and makes a difference to a decision maker.” To afford a better appreciation of these qualities, an abridged schematic diagram of hierarchy of accounting qualities is presented below.
Fig 1. Hierarchy of Accounting Qualities
User specific qualities
Source: Financial Accounting Standards Board (1980:23)
The above diagram suggests that there is the need to balance the emphasis on relevance and reliability in order to ensure comparability. Where there is over emphasis on relevance at the expense of reliability, the information generated would be viewed skeptically by financial report users. Alternatively, where there is much emphasis on reliability at the expense of relevance, financial statements that provide less relevant and less timely information on a firm’s performance would be generated and comparability will be lost.
Based on the foregoing discussion, this study seeks to examine the effectiveness or otherwise of state agencies and industry regulations in ensuring the quality of accounting practice by organizations in Nigeria.
1.2 Statement of the Problem
The quality of accounting practice (QAP) in Nigerian listed organizations has received much attention in recent years. For example, the World Bank (2004), in its report of the Observance of Standards and Codes (ROSC) observed several deficiencies in the standard of accounting and auditing practice in Nigeria. The most prominent of these deficiencies concern the perceived poor institutional weaknesses in regulation, compliance, enforcement of accounting standards/ rules and dearth of professional accountants in the private sector. The report recommended several measures which should be adopted in order to improve the quality of accounting practice. Most of the measures centre on the role which key institutions (tertiary, legislative, legal, regulatory and professional) should play in the transformation process.
In response thereof, new and revised laws and regulations were enacted to implement some of the recommendations of the World Bank. Despite these initiatives, concern and criticisms about the quality of accounting practice in organizations in Nigeria have continued unabated with divergent views among the public, corporate management, auditors and government agencies.
At the core of the issues agitating the minds of the stakeholders are whether the provisions and requirements of state agencies and industry regulations lead to more or less transparent accounting practice. Or whether they lead to situations where everyone looks for loopholes and the regulators have to constantly create new rules to plug them. If so much fraud occurs in spite of these agencies and regulations, stakeholders are wondering whether we need more regulations or whether the regulations are failing and therefore we need less of them.
To our knowledge, only a few empirical studies have directly examined the relation between regulations and the quality of accounting practice in Nigeria. Thus, the central problem of this study is to empirically examine whether or not state agencies and industry regulations with implications for accounting practice are effective in Nigeria with reference to the qualities that define accounting practice—Relevance, Reliability and Comparability of financial reporting. In addition, the study also investigated whether industry attributes influence the level of impact which state and industry regulations have on the quality of accounting practice in Nigeria.
1.3 Objectives of the Research
The overall objective of this study was to provide empirical evidence on the effectiveness or otherwise of state agencies and industry regulation in influencing the quality of accounting practice in Nigeria.
Specifically, the objectives of this study are to:
(1) Examine the impact of state agencies and industry regulations on the quality of accounting practice in Nigeria.
(2) Ascertain whether or not there is any significant difference in the quality of accounting practice in Nigeria following the pronouncements of the NASB Act, 2003.
(3) Ascertain whether or not the quality of accounting practice differs significantly among industrial sectors in Nigeria.
(4) Assess whether or not there is any significant impact of industry attributes on the quality of accounting practice in Nigeria.
1.4 Research Questions
In order to achieve the objectives of this research study, an attempt was made to provide answers to the following research questions
(1) Of what significant impact are state agencies and industry regulations on the quality of accounting practice in Nigeria?
(2) To what extent has the quality of accounting practice been significantly influenced by the promulgation of NASB Act2003?
(3) What significant difference exists in the quality of accounting practice among industrial sectors in Nigeria?
(4) What significant impact do industry attributes have on the quality of accounting practice in Nigeria?
1.5 Research Hypotheses
To achieve the objectives of this study, the following hypotheses stated in null form were tested.
(1) H0: State agencies and industry regulations have no significant impact on the quality of accounting practice in Nigeria.
(2) H0: There is no significant difference in the quality of accounting practice in Nigeria following the pronouncement of the NASB Act, 2003.
(3) H0:The quality of accounting practice among industrial sectors in Nigeria does not significantly differ.
(4) H0: There is no significant impact of industry attributes on the quality of accounting practice in Nigeria.
1.6 Significance of the Study
The use of state agencies and industry regulations to improve accounting practice by enforcing compliance with accounting standards is becoming popular. Evidence from prior studies have shown the benefits of governmental intervention in the financial reporting process either by way of administrative agency controls or by enactment of specific legislative instruments (Inchausti, 1997; Walker and Mack, 1998). This process is desirable for the overall growth of the Nigerian economy.
The major significance of this study therefore is that it will aid the understanding of the impact which state agencies and industry regulations have on the quality of accounting practice in Nig
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