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ETHICAL COMPLIANCE OF THE ACCOUNTANT ON THE
QUALITY OF FINANCIAL REPORTING OF BANKS IN RIVER STATE.
ABSTRACT
The study investigates the effects of ethical
compliance of the accountant on the quality of financial reports of banks in
Rivers State, Nigeria. Five research questions and five hypotheses guided the
study. The sample for the study which was eight banks that were systematically
and purposively selected from the number of banks quoted in the Nigerian Stock
Exchange. A five point scale questionnaire was used with items on ethical
standards of integrity, objectivity, confidentiality and accountability was sued
and that of quality of financial reports of relevance, faithful presentation,
understandability, comparability and timeliness of banks financial reports.
Data collected by the designed questionnaire was analyzed using descriptive
statistics tools and multiple regression models with the help of excel and
e-view software packages. The result of the linear multiple regression models
analysis confirms that ethical standards compliance by accountants affect the
quality of financial reports of banks, but showed that only integrity and
objectively of accountants affects all the quality of financial reports in the
various models and confidentiality and that of accountability do not affect the
quality of financial reports of banks in the models. The conclusion drawn from
the findings is that the ethical compliance of the account on professional
ethics will improve the quality of financial reports of banks in Nigeria. Based
on the findings of study, some recommendations were made, among which are that
banks should establish a relevant and functional position for ethics officers;
creation of non-threatening environment for the discussion of ethical problems
and co-operation between accountants, other employees and management in solving
ethical difficulties that prevail or imping on the working environment. The
accountant should up hold both the codes of professional ethics and that of
their organization in the execution of their day-to-day responsibilities or
duties.
TABLE
OF CONTENTS
Title Page i
Declaration Page ii
Certification Page iii
Dedication Page iv
Abstract v
Acknowledgment vi
Table of Contents vii
List of Tables viii
List of Figures xi
CHAPTER
ONE: INTRODUCTION
1.1 overview
of the study 1
1.2 statement
of the problem 4
1.3 purpose
of the study 6
1.4 research
questions 7
1.5 hypothesis 7
1.6 significance
of the study 8
1.7 definitions
of terms 9
1.8 limitations
of the study 10
1.9 scope
of the study 11
1.10 organization of the study 11
CHAPTER
TWO: REVIEW OF LITERATURE
2.1 Introduction 15
2.2 theoretical
framework 16
2.2.1 what is ethics 16
2.2.2. ethics in the accounting profession 20
2.2.3 basic approaches of ethical behaviour 27
2.2.4 compliance with ethical standards 29
2.2.5 financial reporting 30
2.2.5.1 development of corporate financial report 36
2.2.6. ethical behaviour and financial reporting 38
2.2.7 ethical behaviour and performance 41
2.2.8 factors responsible for low ethical
behaviour 43
2.2.9 ensuring good ethical behaviour in business 44
2.2.10 measurement methods of the quality of
financial
reporting 46
2.2.11 evolution, structure and organization of
banks 55
2.3 empirical
review 59
CHAPTER
THREE METHODOLOGY
3.1 Introduction 67
3.2 research
design 67
3.3 sampling
and sample size determination 69
3.4 data
collection method 72
3.5 operational
measures of variables 72
3.6 validity
and reliability 93
3.7 data
analysis 94
CHAPTER
FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Introduction 99
4.2 return
of questionnaires 99
4.3 analysis
of research questions 101
4.4 hypothesis
testing 110
CHAPTER FIVE: DISCUSSION, CONCLUSION AND
RECOMMENDATIONS
5.1 Discussion 127
5.2 conclusion 128
5.3 recommendations 129
Bibliography
Appendix 1- letter of introduction
Appendix 2- questionnaire
Appendix 3-questionnarie
LIST
OF TABLES
Table Title Page
2.1 empirical
studies on ethical behaviour 54
3.1 population
of the study 58
3.2 sample
banks 67
3.3 measures
used to operationalize the dependent variable 68
3.4 measurement
of analyzed questionnaire 70
4.1 analysis
of analyzed questionnaire 76
4.2 ethical
standards of accountants and relevance of
financial reports of
banks 94
4.3 descriptive
statistics for ethical standards and relevance
of financial reports
of banks 95
4.4 ethical
standards of accountants and faithful presentation
of financial reports
of banks 96
4.5 descriptive
statistics for ethical standards and faithful
presentation of
financial reports of banks 97
4.6 ethical
standards of accountants and understandability
of financial reports
of banks 98
4.7 descriptive
statistics for ethical standards and
understandability
of financial reports 99
4.8 Ethical
standards of accountants and comparability of
financial reports 100
4.9 descriptive
statistics for ethical standards and comparability
of financial reports 101
4.10 ethical
standards of accountant and timeliness of
financial reports of
banks 102
4.11 descriptive statistics for ethical standards
and timeliness
of financial reports 103
4.12 regression
output for relevance and ethical standards 104
4.13 regression
output for faithful presentation and ethical
standards
107
4.14 regression output for understandability and
ethical
standards 110
4.15 regression
output for comparability and ethical standards 112
4.16 regression output for timeliness and ethical
standards 115
LIST
OF FIGURES
Figure Title Page
2.1 ethical
compliance mechanism 28
CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW OF THE STUDY
Widespread
corruption in the business environment seems to be the order of the day in
almost all societies. United Kingdom, corporate scandals have involved such
companies as independent insurance and BCCI. Recent times had witnessed the
collapse of a number of corporate giants in the USA such as Enron Corporation,
Tyco International, WorldCom, Global Crossing, Arthur Anderson etc (Ajibolade,
2008). Similarly, Liftig and Quellete (2009) noted that Enron, WorldCom, Tyco,
Cedant are companies that collapsed as a result of unethical practices. Bern ie Madoff, former Chairman of the NASDAQ, is
now cooling his heels in jail. The ex-CEO of converse is arrested in Nambia,
the CEO at United Health care is forced to step down, and Patrica Dunn of Hewlet Packard is charged in an ethics
scandal.
And,
of course, AIG has no problem doling out millions in bonuses to the very people
who drove the company in financial crisis. It seems that no matter where we
look today, the erosion of ethics and basic moral principles of right and wrong
have taken us to a situation where the very systems that make society work are
in imminent danger of oblivion.
According
to Auguolu (2006), these failures have brought to greater scrutiny the work of
the accountant from both within the profession and from outside. Beverly et al
(2007) says certain factors have been identified as contributing to unethical
behaviour such as self-interest, failure to maintain objectivity and
independence, inappropriate professional judgment, lack of ethical sensitivity,
improper leadership and ill culture, failure to withstand advocacy threats,
lack of competence, and lack of organizational and peer support and lack of
professional body support.
Also
Nielson (1989) in Sims (1992) says managers behave unethically contrary to
their ethical philosophies represents serious limit to ethical reasoning in the
firm. Research in ethical behaviour strongly supports the conclusion that if
ethical behaviour is desired, the performance measurement and reward systems
must be modified to account for ethical behaviour (Adler and Ajibolade, 2008).
Accounting professionals, who are once historically regarded as the watchdog of
the society, are being implicated in these scandals which have cost the
investing public huge financial losses.
Brewer
et al (2006) says it is obvious that for the good for everyone, including the
business organizations themselves, it is vitally important that business be
conducted within an ethical framework that builds and sustains trust. The
society holds for the accounting profession high ethical expectations well
beyond the norm. conducting business within an ethical framework is believed to
rest largely on accountant’s sensitivity to ethical issues.
Idialu
and Oghuma (2007) in Ajibolade (2008) have noted that a general belief that
without the accountants aiding unethical practices in business and in public
service as a whole, there would be no corruption. Therefore, ethical behaviour
by business people in general and accountants in particular, is not a luxury or
a discretionary good thing to do but an absolute necessity for the smooth
functioning of an economy.
Sims (1992)
observed that the imperative of day-to-day to organizational performance are so
compelling that there is little time or inclination to divert attention to the
moral content of organizational decision-making. Morality appears to be so
esoteric and quantitative in nature that it lacks substantive relation to
objective and quantitative performance. Commenting on this state of affairs,
Nwachukwu (2007:23) maintained that:
The ethical standard of a company are
determined by the ethical standards of the executive. The set the ethical
behaviour patterns to be emulated by the subordinates. If they resent and
firmly condemn unethical practices in the company, subordinates will toe the
line. The subordinate’s ethical behaviour is reinforced and influenced by the
behaviour of management.
These
recent events have consequently renewed interest in the question of ethics in
the business environment and in the accounting profession in particular. They
have created a new challenge for the accounting profession in terms of the
ethics development of its members. Why would members of a respected profession
with strict ethical standards, be so willing to be in breach of the standards by
engaging in the level of ethical violations noted in recent times? Some
suggestions have linked part of unethical bevhviour, to the pressure on private
sector employees to get things done, with little attention to how things are
done.
Every
organization must demonstrate and nurture its ethical guidelines and follow the
ethical process of documented ethical code that is shared with all the
employees of the organization. Compliance to the code is a must for all systems
that attempt to identify certain behaviours or means which are in them
unethical. Therefore, organizations that follow ethical guidelines code of
conduct and also comply to them fully have greater chances of not getting into
legal penalty suits for illegal and unethical behaviour.
Given
this renewed interest in ethics in the accounting profession and the concern
for improving professional ethics, there is need to evaluate the extent to
which ethical compliance of accountant is affecting the quality of financial
reporting and performance of organizations. This study is an attempt to provide
such evidence, investigates the effects of ethical compliance of accountants on
the quality of financial reporting of banks in Rivers State.
1.2 STATEMENT OF THE PROBLEM
Ethical
problems in organizations continue to greatly concern society, organizations
and individuals, the potential impact that organizations can have on ethical
behaviour has not really been explored (Helleigel et al, 1989 in Sims, 1992).
The challenge of ethical behaviour must be met by organizations if they are
truly concerned about survival and competitiveness.
Ethical
behaviour may be considered a lubricant that keeps the economy running. Without
that lubricant, the economy would operate less efficiently, less would be available
to consumers, quality will be lower and prices would be higher (Ajibolade,
2008; Mathews and Perera, 1996). The outcomes of the many cases of unethical
bankruptcies, loss of investments and savings and loss of public confidence
have all shown that unethical behaviour in business is not only morally wrong
but also disastrous for an economy.
Furthermore,
we hear about illegal and unethical behaviour on Wall Street, pension scandals,
in which disreputable executive gamble on risky business ventures with
employees retirement funds, companies that exposes their workers to hazardous
working conditions, and blatant favouristism in hiring and promoting practices.
Luftig
and Quellete (2009:14) made this submission on the decline of ethical behaviour
in business with these words:
An organization has many reasons for
operating ethically, including avoiding fines and litigations, reducing damage
to the firm’s direct and indirect cost control, creating a competitive
advantage, and avoiding corruption. On the other hand, unethical behaviour in
firm’s results lowers productivity, especially among highly skilled employees;
lower financial performance as measured by metrics such as economic value added
and abnormally negative returns to shareholders for prolonged periods of time.
The
Nigerian business environment is plagued with ethical problems (Oladoyin et al,
2005 in Ajibolade, 2008). Cases of unethical business behavioour and corporate
scandals involving such large companies as African Petroleum PLC, Cadbury Nigeria
PLC and Lever Brothers Nigeria PLC have been reported in addition with the
collapse of many banks and other financial institutions are linked to various
acts of ethical violations.
Such
acts and collapse were allegedly as a result of wide spread fraud with
accounting firms and professional playing a significant role. The management of
most of these companies were found to engage in fraudulent activities and are
being aided by auditors, who were able to cover up these activities through
fraudulent financial reporting, thereby misleading the investigating public,
employees and providers of fund. Prominent among them is the demise of once
respected accounting firm, Arthur Anderson (Ajibolade, 2008). The determination
of the effect of ethical compliance on the performance of firms are the subject
of many studies over the years (example, Fatt, 1995; D’A quila, 2001; Webley
and More, 2003; Flugrath, Bennie-Martinov, and Chen, 2007); therefore, this
research hopes to provide fresh evidence from Nigeria and therefore expected
not only to help enrich the literature but also to serve as an important
quantitative information.
It
is on the basis of this that the researcher intends to find out, where the
problem is. To what extend to ethical violations affect the quality of
financial reports? Does it mean that ethical standards of integrity, objectivity,
honesty and accountability banks? Therefore, this study is to contribute to the
growing debate on the need for accountants job of financial reporting of the
activities of banks. Therefore, this is the gap this study intends to fill.
1.3 PURPOSE OF THE STUDY
This research is aimed at
investigating the effects of ethical compliance of accountants on the quality
of financial reporting of banks in Rivers State.
1. To determine the extent to which standards
of accountants affect the relevance of financial reports of banks.
2. To evaluate the extent to which ethical
standards of accountants affect the faithful representation of financial
reports of banks.
3. To ascertain the extent to which
understandability of accountants affect the quality of financial reports of
banks.
4. To find out the extent to which ethical
standards of accountants affect the comparability of financial reports of
banks.
5. To determine the extent to which ethical
standards of accountant affect the timelines of financial reports of banks.
1.4 RESEARCH QUESTIONS
The
following research questions have been addressed in this study:
1. To what extent do ethical standards of
accountants affect the relevance of financial reports of banks?
2. To what extent do ethical standards of
accountants affect the faithful presentation of financial reports of banks?
3. To what extent do ethical standards of
accountants affect the understandability of financial reports of bank?
4. To what extend do ethical standards of
accountants affect the comparability of financial reports of banks?
5. To what extend do ethical standards of
accountants affect the timelines of financial reports of banks?
1.5 HYPOTHESIS
The
following hypotheses have been formulated and tested for validation of
findings:
H01:
The ethical standards of accountants do not affect the relevance of financial
reports of banks.
H02:
The ethical standards of accountants do not affect the faithful presentation of
financial reports of banks
H03:
The ethical standards of accountants do not affect the understandability
financial reports of banks.
H04:
The ethical standards of accountants do not affect the comparability of
financial reports of banks.
H05:
The ethical standards of accountants do not affect the timelines of financial
report of banks?
1.6 SIGNIFICANCE OF THE STUDY
In view of the fact that the study of
ethical compliance is quite fascinating, the findings of this study will be
significant to organizations in the banking industry and other sectors. The
study would be beneficial to these organizations by establishing the need to
take ethical issues very seriously. This is because unethical practices by
organizations affect their performance negatively.
The
study also will be significant in the following ways:
1. It will provide solutions to the various
problems encountered by organizations on ethical behaviour and how these
problems affect the quality of financial reporting and performance.
2. It will enable clients and potential
clients a basis for feeling confident that organizations with ethical code
desires to serve them well and places service above financial reward.
3. It will enable organizations to understand
that there is strong evidence between ethical behaviour and the quality of
financial reporting and performance as a benchmark for achieving overall
corporate objectives.
4. It will enable organizations to understand
that there is strong evidence between ethical behaviouir and the quality of
financial reporting and performance. Those organizations that are explicit
about ethical compliance will outperform in financial and other indicators than
those companies who do not have a code of ethics.
5. Management of companies will benefit greatly
since the findings of this study is aimed at improving their performance.
6. Finally, the study will serve as a source
of secondary data for future research to students who intend to carry out a
study on ethical compliance and the quality of financial reporting and
performance of organizations. Furthermore, the research findings will provide a
means of bridging the knowledge gap in the very important area of ethical
behaviour in organizations, thereby contributing to the existing body of
knowledge.
1.7 DEFINITION OF TERMS
Accountability:
It is the process of being accountable; rendering the duty of stewardship in
accordance with lay down principles.
Confidentiality:
The non-disclosure of information acquired in the course of professional work
confidential to client or employer.
Ethical Behaviour: Ethics are standards of behaviour within a
group or society that indicates how we should behave to achieve the goals upon
which the society places importance.
Ethical Compliance:
This is the commitment to the code of ethics in the conduct of organizational
activities to achieve desired goals and objectives.
Financial
Performance: This is the process of supplying
general purpose financial information to people outside the organization.
Integrity:
It is a situation where an individual has the responsibility of refraining from
engaging in any activity that would prejudice his ability to carry out his or
her duties ethically.
Objectivity:
It is a situation where an individual has to be fair and free from conflicts of
interest.
1.8 LIMITATION OF THE STUDY
As with all empirical studies, the
findings that will be reported in this study will be evaluated in the light of
limitations imposed by the research design and implementation. It is doubtful
if there will ever be any research that runs smoothly without presenting some
limitations to the researcher such as scarcity of relevant literature, locating
previously related research work, funds and attitude of respondents. However, due
to the typical Nigerian attitude towards the release of information about their
organization which they consider as confidential, some respondents were
Lukewarm during collection of information.
However, despite the above
limitations, the much needed data for the research work was collected and the
objective for the study were equally been achieved.
1.9 SCOPE OF THE STUDY
This research intends to concentrate
on the Port Harcourt business environment and in so doing; the researcher
systematically sampled eight banks quoted in the Nigeria Stock Exchange. The
researcher studied the following banks: Ecobank Nigeria PLC, First Bank of
Nigeria PLC, Guaranty Trust Bank PLC, Bank PHB PLC, Skye Bank PLC, United Bank
for Africa PLC, Standard Chartered Bank Nigeria PLC, and Zenith Bank PLC.
This
scope delimitation is taken to be adequate as to provide the necessary data
upon which a reasonable conclusion on ethical compliance of the accountant on
the quality of financial reporting of bank.
1.10 ORGANIZATION OF THE STUDY
This
research is organized into five chapters. The stud begins with chapter one by
taking a cursory look at the concept of ethical behaviour, stating the problems
that necessitated the study objectives, significance and the limitations of the
study itself. Chapter two reviews relevant literature on ethics and ethical
behaviour, financial reporting and financial performance. Also, looked into are
seminar paper presentations, journals and publications from societies and
professional bodies like institute of Chartered Accountant of Nigeria and
institute of Business Ethics of the United Kingdom.
In
the third chapter, methods and techniques of collection and sampling of data
will be highlighted. The fourth chapter presents and analyses the data
collated, and evaluates the effects of ethical behaviour on the quality of
financial reporting of banks.
The
final chapter (chapter 5) draws a summary and conclusion on the research study,
with recommendations which are believed to enhance the operations of
organizations in order to enable them optimize their organizational goals; and
poses further areas of studies aimed at refining ideas and contributing more to
knowledge.
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