VOLUNTARY ACCOUNTING DISCLOSURE AND CORPORATE CHARACTERISTICS A STUDY OF SELECTED QUOTED COMPANIES IN NIGERIA
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VOLUNTARY
ACCOUNTING DISCLOSURE AND CORPORATE CHARACTERISTICS
A STUDY OF
SELECTED QUOTED COMPANIES IN NIGERIA
LIST OF TABLES
3.1 voluntary disclosure check list 62
4.1 descriptive
information 66
4.2 list of companies
based on market sector 67
4.3 Tested variables 67
4.3.1 correlation
matrix 68
4.3.2 static
regression results 69
4.3.3 static
regression results 70
4.3.4 static
regression results 71
4.3.5 static regression
results 72
4.3.6 static
regression results 73
ABSTRACT
This study investigated the association between
voluntary accounting disclosure and corporate characteristics in the Nigerian
financial and listed sector. Using the judgmental sampling technique, a total
of 30 listed firms have been selected for this study based on the availability
of their annual reports. Also, using the content analysis method of eliciting
data, a scoring scheme was used for measuring the extent of voluntary Accounting
disclosure in the annual report. The data was analyzed using the E-view
computer software 3.1. The study observed that a positive level of voluntary
accounting disclosure y listed company. While no association between
profitability and voluntary accounting disclosure. Also it was found that
compliance has improved. This study therefore calls for regulatory bodies to
put in place stronger reporting framework in order to still improve the level
of voluntary accounting disclosure among listed firms in the financial and
non-financial industry.
TABLE OF CONTENTS
Title Page i
Declaration ii
Dedication iii
Acknowledgement iv
Table of Contents v
List of Tables vi
Abstract vii
CHAPTER
ONE: INTRODUCTION
1.1 overview
of the problem 1
1.2 statement
of the problem 4
1.3 purpose
of the study 7
1.4 research
questions 8
1.5 research
hypotheses 8
1.7 scope
of the study 9
1.8 limitation
of the study 10
1.9 definition
of terms 12
1.10 organization of the study 15
CHAPTER
TWO: REVIEW OF RELATED LITERATURE
2.0 Introduction 17
2.1 corporate
characteristics 17
2.1.1 board size 18
2.1.2 profitability 19
2.1.3 leverage 21
2.1.4 audit size 21
2.2 determinant of corporate financial
reporting 23
2.3
motives for voluntary disclosure 26
2.4 benefits
of voluntary disclosure 29
2.5
the extent of disclosure 31
2.6 development
of accounting standards (National and )
International 32
2.7
international accounting standards board 33
2.8 theory
governing financial reporting 38
2.8.1 the positive accounting theory 38
2.9 compliance
on IAS/IRS and financial reporting 47
2.10 association between board size
and voluntary accounting
disclosure 52
2.10.1 association between
profitability and voluntary
accounting
disclosure 53
2.10.2 Association between leverage
and voluntary
accounting disclosure 54
2.10.3 association between audit size
and voluntary
association
disclosure 56
CHAPTER
THREE: RESEARCH METHODOLOGY
3.0 Introduction 58
3.1
research design 58
3.2 sampling
procedure sample size determination 59
3.3 data
collection method 60
3.4 operational
measures of the variables 61
3.5 analysis
of data 62
CHAPTER
FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction
66
4.2 descriptive
statistics of voluntary discourse 66
4.3 testing
of hypothesis suing secondary data 68
4.3.1 correction matrix 68
4.3.2 hypothesis one 69
4.3.3 hypothesis two 70
4.3.4 hypothesis three 71
4.3.5 hypothesis four 72
4.3.6 hypothesis five 73
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.0
Introduction 75
5.1 summaries
of findings 75
5.2 conclusion 78
5.3 recommendations 79
Bibliography 81
Appendices 86
CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW OF THE PROBLEM
According
policy choice and incentive considerations affect the quality of accounting
disclosure and the communication between firms and users of accounting
information. There are cases where managers influence the reported earnings in
order to maximize their interest, such as to improve their reputation and
reinforce the stock returns and their compensation plans (Fields, Lys, and
Vincent, 2001). Managers also tend to influence their accounting numbers in
order to meet their financial obligations and abide by the debt covenants that
are set by lenders (Lambert, 2001). The violation of debt covenant would be a
negative signal of corporate performance, would therefore have negative
implications for the creditability and stock behaviour of the firm.
The
informativeness of disclosed
accounting information varies from firm to firm Kothari, and Robbin, 2000).
Firms are usually more eager to disclose good information, while they tend to
delay the announcement of bad information (Aboody and Kaznik, 2000). Thus, good
information is essentially reflected in stock returns when it is announced,
while bad information constitutes new information to investors (Hand,
Holthanuse, and Leftwich, 1992). Firms with informative disclosures tend to
exhibit larger analyst following and less dispersion in analyst forecasts (Lang
and Lundholm, 1993).
The
extent to which voluntary disclosure is effective and contributes to the
efficient allocation of resources in the stock market is closely related to the
credibility of the accounting information that is disclosed. The managers
earnings forecasts with the actual financial results. The literature shows that
the stock market responds positively to forecasts of earnings increases, but
negatively to forecasts of earning decreases (Ajinkya and Gift, 1984).
The
business environment has witnessed changes over the years, mainly influenced by
globalization and technological innovation. In recent years, there has been
substantial increase in trading activities at the stock Exchanges worldwide and
Nigeria is not left out. For example, the market capitalization at the Nigerian
Stock Exchange was N763.9 billion in 2002; it grew to N2.112 trillion in 2004
companies worldwide are now vying to penetrate international capital markets.
The disclosure of adequate and reliable information is necessary to penetrate
these international markets. Those competing for funds in the international
capital arena have been found to comply with disclosing mandatory requirements
and in addition disclose significantly more voluntary accounting information
than enables them to compete globally (Meek, Roberts and Gray, 1995).
Corporate
transparency is determined by the information it disclosure in its financial
report. Accurate, relevant and reliable disclosure are seen as means of
enhancing corporate image, reducing cost of capital, and improving
marketability of shares. High-quality accounting information facilities the
acquisition of short and long term fund and also enables management to properly
account for the resources put in their care. Thus, it acts as a significant
spur to the growth and development of money and capital markets, which are
fundamental to the smooth running of any economy. Meek et al (1995) submit that
effective functioning of capital markets, however, significantly depends on the
effective flow of information between the company and its stakeholders.
In
the Nigeria context, compressive studies of Nigerian listed companies have been
conducted by World Bank Group. It is observed that the Nigerian financial
reporting practices are deficient (World Bank, 2004). Apart from the studies
conducted by the World Bank, disclosure practices by Nigerian companies have
been empirically investigated by Wallace (1988), Okike (2000), and Ofegbu and
Okoye (2006). Their observation is quite similar in that they all found the
Nigerian corporate reporting practices to be weak.
The
current global financial and economic crunch has resulted in increased
attention to improve and enforce financial reporting disclosures worldwide in
order to reform the global economy. Nigeria is recently taking steps to align
all corporate reports to the international financial Reporting standards
(IFRSs) as a means of enhancing full disclosure and strengthening stakeholder
confidence. Nigeria Stock Exchange has directed all companies that are listed
on the exchange to adopt the IFRSs by December 2011 while the Central Bank of
Nigeria has also told Nigeria banks to adopt the IFRSs by December 2010 (Egedegbe,
2009).
1.2 STATEMENT OF THE PROBLEM
Published
annual reports are required to provide various users shareholders, employees,
suppliers, creditors, financial analysis, stockbrokers, management, and
government agencies with timely and reliable information useful for making
prudent, effective and efficient decisions. The extent and quality of
disclosure within these published reports vary from company to company and also
from country to country.
Literature
reveals that the level of reliable and adequate information by listed companies
in developing countries lags behind that in developed ones and government
regulatory forces are less effective in driving the enforcement of existing
accounting standards (Ali, Ahmed and Henry, 2004). Non-disclosure results from
immature development of accounting in developing nations (Osisioma, 2001). The
government regulatory bodies and the accountancy profession in these nations
suffer from structural weaknesses which could encourage corporate fraud at the
expense of those that have economic and propriety interest in the business
environment.
The
voluntary disclosure of financial information in corporate annual reports and
their determinants have attracted considerable research attention in the
developed countries than developing ones (Akhtarudddin, 2005: and Barako,
2007). Discoveries in the developed countries most especially in the European
Union (EU) have aided in the government to revamp the compliance mechanisms.
They have also assisted the government in issuing out directives that
facilitate the harmonization process and invariably bring all community
companies up to a reasonable level of disclosure.
It
is often alleged, however, that listed companies do not fully comply with the
disclosure requirements stipulated by the regulatory agencies (Akhtaruddin,
2005). Emerging nations have been under pressure to improve their quality of
corporate financial reporting. According to Ali et al, (2004), the government
regulatory bodies and the accountancy profession of emerging nations suffer
from structural weakness and often take a lenient attitude towards default of
accounting regulations. Consequently private and institutional investors (local
and foreign) are hesitant in investing in such emerging economics due to lack
of transparency.
The
lapse in the financial reporting system had led to the presentation of the
financial reporting Council (FRC) Bill to the National Assembly in Nigeria. The
Bill is still currently under debate at the National Assembly. The FRC Act when
enacted would replace the NASB Act with enlarged functions (Nnadi, 2009). It is
expected to go a long way in strengthening the financial reporting system in
Nigeria and to ensure credence of financial reports and corporate disclosure
practices among Nigerian companies.
Incessant
changes in the global business and reporting environment new developments and
updates on the local and international accounting standards, changes in
corporate structure, and legislation call for a constant update in the research
in this area of study. Additional empirical evidence on voluntary disclosures
and the factors influencing them in Nigeria will enhance the quality of literature
in this field of study. Thus, this makes a research of this nature of paramount
interest.
This
study investigates the disclosures practices of listed companies in Nigeria to
see how they comply with voluntary rules established by the regulatory bodies.
In addition, it examines the association between company characteristics and
the extent of disclosure. This study will contribute to the growing literature
on the determinants of corporate voluntary disclosure level and the findings of
the study would be of immense interest to listed companies, investors, and
those involved, and those involved in standard setting processes.
As
far as we are aware there is currently no published study examining the
determinants of corporate disclosures reporting by Nigeria own firms. The
present study seeks to fill this gap by testing a set of hypothesis on the
influence of several factors on the level of voluntary information disclosed by
a sample to Nigeria own companies in their financial statements.
1.3 PURPOSE OF THE STUDY
The
purpose of the study is to provide empirical evidence to the disclosure
practices of listed companies in Nigeria. Specifically, the objectives of this
research are:
i. Empirically
determine the extent of compliance of the listed financial and non- financial
Nigerian companies with the disclosure requirements of Nigerian Accounting
Standard Board (NASB);
ii. Examine
empirically the relationship between board size and voluntary accounting
disclosure;
iii. Examine
whether there is a relationship between profitability and voluntary accounting
disclosure;
iv. Examine
whether there is a relationship between leverage and voluntary accounting
disclosure and
v. Examine
the relationship between auditor size and voluntary accounting disclosure.
1.4 RESEARCH QUESTIONS
The
research objectives are guided by the following research questions.
i. What
is the extent of compliance of listed financial and non-financial Nigerian
companies with the required disclosures of the Nigerian Accounting Standards
Board (NASB)?
ii. What
is the relationship between board size and voluntary accounting disclosure?
iii. Does
profitability have any effect on voluntary accounting disclosure?
iv. What
is the relationship between leverage and voluntary accounting disclosure?
v. Does
auditor size affect voluntary accounting information disclosure practices of
listed Nigerian companies?
1.5 RESEARCH HYPOTHESES
In
this study, four hypotheses are formulated to achieve the research objectives i
to iv respectively. The hypotheses are hereby stated in the null and
alternative forms.
H01:
There
is no significant association between listed financial and Non- financial
companies with Voluntary Accounting disclosure.
H02:
There is no significant association between board size and the extent of
Voluntary Accounting disclosure by Nigerian listed companies.
H03:
There is no significant association between profitability and the extent or
Voluntary Accounting disclosure by Nigerian listed companies.
H04:
There is no significant relationship between leverage and voluntary accounting
disclosure.
H05:
There is no significant relationship between auditor size and voluntary
accounting disclosure.
All
hypothesize are stated in the null.
1.6 SIGNIFICANCE OF THE STUDY
Accurate
corporate reporting is a necessary tool for the short and long term survival of
any nation. It aids budgeting, planning and decision making. It had been
suggested by previous researchers that institutions in developed economy cannot
be transplanted in developing economics and so research on disclosure practices
in a country like Nigeria will enable us to have a thorough understanding of
the nature of corporate reporting in developing countries (Wallace, 1988). Disclosure
practices by Nigerian companies were empirically investigated by Wallace
(1988), Okike (2000), Adeyemi (2006) and Ofoegbu and Okoye (2006) in the past,
and they all discovered that corporate reporting practices in Nigeria is
deficient.
The
study is significant to government, investors, business management, regulatory
bodies, educators, researchers, accountants, auditors and scholars particularly
in the field of accounting. This research seeks to make theoretical and
practical contributions to the field of accounting in the area of accounting
disclosures. It will particularly enhance the quality literature in the field
of accounting in Nigeria researchers in this field would benefit from the study
because it can serve as a bench mark for future research on corporate
disclosure it throws more light and adds to understanding on the corporate
disclosure practices which would be of advantage to educators and students.
With
the outcome of this research, the regulatory authorizes, such as the Nigerian
Accounting Standards Board (NASB), Nigerian Stock Exchange (NSE) and Securities
and Exchange Commission (SEC) would be able to ascertain the extent of
compliance with the mandatory national standards. This will help them to issue
out necessary compliance directives and improve the compliance mechanisms to
ensure a reasonable level of compliance by all companies. With the knowledge of
the extent of compliance with the IAS/IFRSs, the government will enforce
directives that would help in facilitating the harmonization process with the
international standards.
1.7 SCOPE OF THE STUDY
In
other to achieve the objectives of this study, corporate annual reports for the
period 2009-2010 will be analyzed. Also, using the judgmental sampling
technique, a total of 30 firms from the financial and non-financial sector of
the Nigerian stock exchange was selected for this study (see appendix). The
preference for these firms is motivated by the fact that their annual reports
are easily accessible, making it simpler for comparisons. More so, they are
directly responsible for the financing of most firms from the manufacturing
industry.
Based
on the nature of this research, two approaches were adopted in executing the
objectives: survey and content analysis method. The survey research entailed
administering questionnaire to a random sample of auditors, accountants and
accounting information users in Rivers State. The primary survey was conducted
during the second half of year 2010 to the first quarter of 2011. It identifies
the opinion of respondents on disclosure practices of listed Nigerian companies
and on consequences of non-disclosure. Due to the nature of research, the
respondents are limited to prepares, auditors and knowledgeable users
conversant with the disclosure requirements of the accounting standards.
The
annual report (content analysis) research entails a sample of companies from
the equity main list of the Nigerian Stock Exchange. The study covers the
annual reports with period ending, January to December 2010.
The
companies are generated from both the financial and non-financial sectors. A
researcher developed check is constructed containing 20 information disclosure
items. The annual report study is restricted to the first-tier market of the
Nigerian stock exchange because it is of paramount interest to investors. The
second tier market and companies not quoted at the Nigerian stock exchange are
not put into consideration due to non availability of data and time constraint.
Moreover, they are outside the scope of this work.
Based
on previous studies, availability of data and its relevance to the
socio-economic environment of Nigeria, only four independent variables are
selected as proxies for corporate characteristics. These variables are: Board
size, profitability, leverage, size of audit firm.
1.8 LIMITATION OF THE STUDY
A
limitation would be anything beyond the ability of the researcher to control
that affect the internal validity of the study. The internal validity of an
experiencing is the extent to which extraneous variables have been controlled
by the researcher, so that any observed effect can be attributed solely to the
treatment of the variable (Gall et al 1996).
In
course of carrying out this research a number of limitations was encountered by
the researcher, which will include:
Time
Lack
of sufficient time constituted one of the greatest problems the researcher
encountered; however some personal activities were shelved to allow for some
time into this work.
Finance
The
study sample was restricted due to fund; this is because a wider coverage would
require huge funding which the researcher cannot afford. This problem was
overcome through raising funds from friends and relatives.
LACK OF CO-OPERATION
This
also constituted yet another problem as some workers were not be willing to
give vital and necessary data, however effort were made to create rapour with
them to win their co-operation.
1.9 DEFINITION OF TERMS
Accounting Standards:
are policy documents or rules that guide the preparation and presentation of
financial information. KPMG.
Convergence:
refers to the process of narrowing difference between IRFS and the accounting
standards of countries that retain their own standards.
Corporate Attributes:
are company characteristics that can influence corporate disclosure.
Disclosure:
is the appearance of quantitative or qualitative economic information relating
to business enterprises in the annual reports.
GAAP
is the generally accepted accounting principles
International Accounting Standard
(ISA): is a body of accounting standard issued by the
International Accounting Standards Committee (IASC) now known as IASB.
International Accounting Standard
Board (IASB) is the international standard setting
body responsible for issuing international Financial Reporting Standards
adopted by the IASB accounting standards setting body.
Nigeria Accounting Standards
Board (NASB): is the Nigerian accounting standards
setting body responsible for issuing statement of accounting standards (SAS).
Statement of Accounting Standard
(SAS): is the accounting standard issued by the Nigerian
Accounting Standards Board.
Voluntary Disclosure:
refers to the discretionary release of financial information over and above the
mandatory disclosure.
1.10 ORGANIZATION OF THE STUDY
This
study is organized into five chapters. Chapter one deals with the context of
the problem, purpose of the study, research questions, and hypotheses,
significance of the study, definition of terms and the limitations of the
study. Chapter two deals with the review of related literature on the subject
matter. Chapter three attempts to describe the research design, sampling
procedure, sample size determination, data collection method, operational
measures of the variable and the data analysis techniques. Chapter four deals
with the presentation and analysis of data. Chapter five presents the
discussion, conclusions, and recommendations and finally, there are suggestions
for further research.
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