Adoption of IFRS On Audit Report

ADOPTION OF IFRS ON AUDIT REPORT
QUALITY IN NIGERIA
BY
OBADONI BLESSING UWAM

MAT. NO: SBS/201130509
A PROJECT WORK SUBMITTED TO THE

DEPARTMENT OF ACCOUNTANCY,
SCHOOL OF BUSINESS STUDIES,
AUCHI POLYTECHNIC,
AUCHI, EDO STATE
IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF
HIGHER NATIONAL DIPLOMA (HND)
IN ACCOUNTANCY
SEPTEMBER, 2015
CERTIFICATION
This is to certify that this work was carried out by
OBADONI BLESSING UWAM of the Department of Accountancy,
Auchi Polytechnic, Auchi, Edo State.
It is adequate in scope and quality for the requirement for
the award of Higher National Diploma (HND) in Accountancy.
________________________ ______________
MR. M. M. ALIU DATE
PROJECT SUPERVISOR
________________________ ______________
MR. A. O. ODION DATE
HEAD OF DEPARTMENT
ii
DEDICATION
This project work is dedicated to MRS. EMILLIA
OBADONI OSAKWE, thank you for being my mom and my dad.
iii
ACKNOWLEDGEMENT
First and foremost, I express my gratitude to God
Almighty for seeing me through my programme.
I am exceedingly appreciative to my supervisor; MR. M. M.
ALIU whose guidance and correction of errors serve as a source
of impact to this project.
iv
ABSTRACT
The study tends to enhance transparency, disclosure and

comparability. It is evident that the implementation of IFRS
reinforces stock market liquidity and leads to lower cost of
capital and transaction costs, higher market value and better
reputation. In view of the need to utilize accurate data for this
research, primary data were obtained through a structured
questionnaire to elicit responses from respondents to meet the
requirements of this research. The data for the foregoing study
were obtained from primary source. The primary (data was the
major source which comprised questionnaires which were
administered to the respondents. Based on the statistical test (Z
– Test) used in the testing of the hypotheses, it was discovered
that there was a positive relationship between adoption of IFRS
and audit reports quality in Nigeria. In view of the findings of the
research, the researcher recommended that there should be more
emphasis on awareness of IFRS adoption among
accountants/auditors in Nigeria, which could be achieved by
using the print media, radio and television. It was also
recommended that the FRCN (Financial Reporting Council of
Nigeria) should be more equipped to enable them conduct
adequate awareness and compliance with IFRS and they should
further explain the similarities and differences between IFRS and
GAAP.
v
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of Contents vi
Chapter One: Introduction
1.1 Background to the Study 1
1.2 Statement of Problem 4
1.3 Research Questions 5
1.4 Objectives of the Study 5
1.5 Statement of Hypotheses 6
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8 Limitation of the Study 8
1.9 Definition of Terms 8
Chapter Two: Literature Review
2.1 Introduction 10
2.2 Overview of IFRS 10
2.3 Audit Committee and International Financial
Reporting Standard (IFRS) 18
2.4 Financial Statement Effects on IFRS Implementation 22
2.5 Definition and Meaning of Audit Report Quality 24
2.6 Review of Theoretical Literature 36
2.7 The Effect of IFRS Adoption on Financial Disclosure 41
Chapter Three: Research Method and Design
3.1 Introduction 56
3.2 Research Design 56
3.3 Description of Population of the Study 57
vi
3.4 The Sample Size 58
3.5 Sampling Technique 58
3.6 Sources of Data Collection 58
3.7 Method of Data Presentation 59
3.8 Method of Data Analysis 60
Chapter Four: Data Presentation, Analysis and
Interpretation
4.1 Introduction 61
4.2 Data Presentation 61
4.3 Data Analysis 62
4.4 Test of Hypothesis 76
Chapter Five: Summary of Findings, Conclusion and
Recommendations
5.1 Introduction 83
5.2 Summary of Findings 83
5.3 Conclusion 83
5.4 Recommendations 84
References 86
Appendix I 90
Appendix II 91
vii
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Accounting is the language of business while
financial reporting is the medium through which the
language is communicated. Accounting and financial
reporting are regulated by Generally Accepted Accounting
Principles (GAAP) comprising of accounting standards,
company law, stock market regulations, and so on. GAAP
for accounting and financial reporting gives answers to
differences in business communication between
countries. The global GAAP that is seeking to uni1
accounting and financial reporting world is the
International Financial Reporting Standards (IFRS) issued
by the International Accounting Standards (IASs;
International Financial Reporting Standards (IFRSs);
Standing Interpretations Committee (SIC5)
pronouncements; and International Financial Reporting
Interpretations Committee (IFRICs) guidelines (Ikpefan
and Akande, 2012).
Essien-Akpan (2011) opine that financial report
apart from stating the financial position of an
organization, provides other information such as the value
1
added, changes in equity if any and cash flows of the
enterprise within a defined period time to which it relates.
This information is useful to a wide range of users making
informed economic decisions. The quality of financial
reporting is indispensable to the need of users who
requires them for investment and other decision making
purposes. Financial reports can only be regarded as
useful if it represents the “economic substance” of an
organization in terms of relevance, reliability,
comparability and aids interpretation simplicity. He
further stated that useful accounting information derived
from qualitative financial reports help in efficient
allocation of resources by reducing dissemination of
information asymmetry and improving pricing of
securities. To prepare and audit financial statements,
some accounting convention and principles known as
standards have been put in place by appropriate bodies
set up for the purpose to encourage uniformity and
reliability. They added that, the implementation of IFRS
would reduce information irregularity and strengthens the
communication link between all stakeholders. It also
reduces the cost of preparing different version of financial
statements where an organization is a multi-national.
2
Accounting standards ensures that important matters
regarding preparation and presentation of financial
statements as well as auditing same are not left to whim
of the preparers and auditors. Before IFRS adoption era,
most countries had their own standards with local bodies
responsible for developing and issuance.
According to Tanko (2012), international financial
reporting standards (IFRS) are a set of accounting
standards developed by the International Accounting
Standards Board (IASB) that is becoming the global
standard for the preparation of public company financial
statements. He observed that just like every other system,
IFRS is a systematic approach that promotes
understandability, reliability, relevance and
comparability. He added that IFRS was founded by
contributions from major accounting firms, private
financial institutions and industrial companies, central
and development banks national funding regimes, and
other international and professional organizations
throughout the world.
This study therefore intends to investigate the
adoption of IFRS and audit report quality in Nigeria.
3
1.2 Statement of Problem
The adoption of IFRS tends to enhance
transparency, disclosure and comparability. It is evident
that the implementation of IFRS reinforces stock market
liquidity and leads to lower cost of capital and transaction
costs, higher market value and better reputation. The
higher disclosure requirements and financial reporting
quality that stem from IFRS imply that the adoption of
IFRS would give a positive signal to investors as
information asymmetry and agency costs tend to
diminish. It appears, therefore, that firms that adopt IFRS
would tend to display lower potential for earnings
management. Less subjectivity would lead to fewer
opportunities to influence reported earnings and bonuses
and/or mislead investors. Hence, in countries with strong
investor protection mechanisms, such as the UK, the
costs of IFRS adoption would tend to be lower because the
level of earnings management is lower as managers are
less inclined to manipulate the reported accounting
figures. In contrast, in countries with weak investor
protection mechanisms, the scope for earnings
management would tend to be higher and the quality of
4
financial reporting lower, implying that the costs of
adopting IFRS would be higher.
1.3 Research Questions
In the light of the above, the following research
questions are raised:
1. Is there positive relationship between adoption of IFRS
and audit reports quality in Nigeria?
2. Is there significant relationship between adoption of IFRS
and credibility of audit report?
3. Is there significant relationship between adoption of IFRS
and credibility of financial statement?
1.4 Objectives of the Study
The objective of this study is to examine the
adoption of IFRS and audit report quality in Nigeria.
The specific objectives are:
1. To determine if there is positive relationship between
adoption of IFRS and audit reports quality in Nigeria.
2. To examine if there is significant relationship between
adoption of IFRS and credibility of audit report.
3. To find out if there is significant relationship between
adoption of IFRS and credibility of financial statement.
5
1.5 Statement of Hypotheses
The following hypotheses have been formulated to
serve as a base for this research.
Hypothesis 1
Ho: There is no positive relationship between adoption of
IFRS and audit reports quality in Nigeria.
H I: There is a positive relationship between adoption of
Hypothesis 2
Ho: There is no significant relationship between
H I: There is a significant relationship between adoption
of IFRS and credibility of audit report.
Hypothesis 3
adoption of IFRS and credibility of financial
statement.
of IFRS and credibility of financial statement.
1.6 Significance of the Study
It is expected that this study would consolidate
existing literature on the issues - surrounding the
relationship between adoption of IFRS and audit report
6
quality and thus boosting the empirical evidence from
Nigeria. Furthermore, given the empirical nature of the
study, the outcome of this study would aid policy makers
and regulatory bodies in economic modeling and policy
simulation with respect to the selected variables examined
in the study.
The result of the study would be of benefits to
investment analysts, investors and corporations in
examining the effectiveness of IFRS on audit report
quality.
It will also be useful in stimulating public discourse
given the dearth of empirical researches in this area from
emerging economies like Nigeria.
Finally, it would also add to the available literature
on the area of study while also providing a platform for
other researchers who may want to further this study.
1.7 Scope of the Study
The study is undertaken to examine adoption of
IFRS and audit report quality in Nigeria. The population of
the study is the entire quoted companies operating in
Nigeria, while the sample size is restricted to some
selected staff of five banks quoted in the Nigeria Stock
Exchange.
7
1.8 Limitation of the Study
The major constraints of this project are sourcing
enough materials for this buildup. This is as a result of
newness of the subject of research. Also, the
uncooperative attitude of some respondent greatly affected
the adequate collection of data from the fieldwork.
1.9 Definition of Terms
Audit: Audit is a Latin word meaning “he hears”. It is a
process carries out by qualified persons called auditors,
whereby the account of business organization including
charities, trust and professional firms are subjected to
scrutiny in such details as to accuracy, truth and
fairness.
Auditing: Auditing is an independent examination of and
the expression of opinion on accounts of companies as
presented by management to an appointed auditor in
pursuance of that appointment, and in keeping with any
reliant legislature and other requirements, whether in his
opinion the account show a true and fair view and had be
prepared in accordance with Law.
Financial Statement: The term “financial statement”
covers the Balance Sheet, Income Statement or Profit and
8
Loss Accounts, Statements and explanatory materials,
which are identified as being part of financial statement.
Culture: Culture is defined as the collective programming
of the mind that differentiates one member of a group or
society from the others.
Audit Report: This is the means by which the auditors
express their opinion on the truth and fairness of the
company’s financial statement.
Audit Report Quality: Audit report quality is the
probability that financial statements contain no material
misstatements. It is also is an increasing function of an
auditor’s ability to detect accounting misstatements and
auditor independence as assessed by the market.
Auditor’s Quality: Auditor’s quality is defined as the
overall audit service quality of a certain audit firm.
Accounting: This is concerned with the keeping of
records of daily transactions entered into in the day-to-
day management of a business organization.
9
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Introduction
The introduction of IFRS for listed companies is one
of the most significant capital market and accounting
regulation reforms in the developed and developing
countries in recent years. Therefore, much attention has
been given in the academic and professional accounting
literature to this process and its effect either in the capital
markets, the economic consequences of their voluntary
and mandatory implementation, and so on. Many
researchers have focused studying if the international
standards improve accounting quality, comparability
and/or transparency, among other topics.
This chapter focuses on the review of theoretical
and empirical studies on the adoption of IFRS and
audit report quality.
2.2 Overview of IFRS
The Financial Accounting Standard Board
(FASB) has been collaborating with the International
Accounting Standards Board (IASB) on a joint
convergence project in an effort to increase the
10
international comparability and general acceptability
of financial accounting and reporting. This led to the
issuing of Norwalk Agreement in 2002.
Under the Norwalk Agreement, the FASB and
IASB acknowledged their commitment to developing
high-quality, compatible accounting standards that
could be used for both domestic and cross-border
financial reporting (AICPA, 2010). The movement
toward International Financial Reporting Standards
(IFRS) has gained momentum due to its increased
global acceptance with more than 100 countries
currently requiring or allowing the use of IFRS.
Additionally, the continued globalization of the capital
markets (which increases the importance of
comparable financial reporting around the globe) has
motivated regulators and standard setters to achieve
a single set of high quality globally accepted
accounting standards (BDO, 2010).
As a result of the global acceptance of IFRS,
some developing nations who considered the global
impact it would have on their economies either
11
through foreign aids, foreign direct investment or the
development of the capital market in term of capital
inflow decided to go for IFRS. Many of the developing
nations took that cue from the world major economics
whether to adapt, adopt or converge the IFRS.
Different countries however use different approaches
in adopting IFRS based on their need and ability to
adopt (Azobi, 2010). Though, the impact of IFRS on
the economic growth in the developing nations is still
subject to empirical questions.
In Nigeria, there are different positions the
various stakeholders and concerned professionals are
taken towards migrating to IFRS. The first school of
thought maintained that, the not too good financial
reporting in the country is not about the adoption of
accounting standard but is all about full
implementation of such standards. Their position is
that, the Statements of Accounting Standards (SAS)
in Nigeria has not being fully complied with in
preparing the financial report and if migrated to IFRS,
there is a high probability that the same challenge
12
will still surfaced. However, the second school of
thought believed that, Nigeria cannot isolate itself
from the world. So, this is the time to take a serious
look at IFRS in order to take the full advantage of
what it has to offer which is primarily that the
financial reporting meet international standards for
other attendant benefits.
In line with the position of the latter, the federal
government of Nigeria has come up to say that the
new accounting system, the international financial
reporting standard (IFRS) will take off in Nigeria on
1st January, 2012 (Umoru and Ismail, 2010). The
government of Nigeria involved all stakeholders and
institutions before it finally decided to adopt the IFRS
on a gradual basis (Ezeani & Oladele, 2012).
Among various stakeholders engaged is the
audit committee which plays a critical role in the
effective functioning of the capital markets. Their
oversight and experience also assists company
management teams to navigate rough waters,
capitalize on opportunities, operate efficiently, and, of
13
course, provide timely, reliable financial information
to investors (ICAN, 2009). Now that IFRS has come to
stay with effect from 2012, does the present
constituted audit committees in Nigeria have the
capacity and the knowledge to interpret IFRS based
financial statement considering the recent financial
meltdown and the illiquidity experienced in the
banking sectors and the capital market as a result of
fraud, manipulations of figures and fragrant abuse of
corporate governance? If the present audit
committees find it difficult to detect fraud in the
financial reporting prepared using SAS, how would
they cope with IFRS based financial statement that
involves judgment and especially those areas that
involves estimation?
According to Hung and Subramanyam (2008),
the transition to IFRS brings a particular challenge
for audit committee members. Therefore any
experience if at all obtained in Nigeria SAS
environment by the audit committee members is not
just enough and sufficient anymore.
14
In Nigeria, the Federal government through the
Central Bank of Nigeria (CBN) had asked the quoted
companies to release their 2012 financials prepared
with International Financial Reporting Standards
(IFRS). That means the audit committee members
must be able to evaluate the impact of IFRS adoption
on key performance indicators and drive management
to manage expectations where significant changes
occur as they prepare to comply.
With this notion therefore, having a profound
knowledge of the business is a key element of
understanding and interpreting IFRS financial
statements, meaning that audit committee members
must understand the story behind the financial
performance their companies are reporting.
Awotoye (2013) argue that audit committee
members should evaluate the extent to which
incentives may encourage fraudulent financial
reporting as IFRS involves judgment. Audit committee
should understand areas involving estimates and
their effects on reported results. Audit committee
15
members must ask probing questions and have frank
discussions with management and auditors. The
audit committee has three distinct providers of
assurance over the financial statements - namely
management, internal and external audit. The audit
committee has to have the necessary ability and
financial literacy to use effectively these three forms of
assurance in making an assessment of whether there
has been fraudulent financial reporting and whether
to recommend the financial statements to the board
for approval.
In addition, audit committee members should be
able to do a detailed review of new statements in the
financial statements; evaluate processes used to
obtain information and ensure that sufficient
disclosures are made; know what auditors reported in
their management letter and summary of unrecorded
audit misstatements (Awotoye, 2013).
However, the ability of the audit committee to
effectively discharge this enormous and highly
technical assignments and roles is a function of their
16
understanding of IFRS as a whole. That the present
constituted audit committee in Nigeria will be able to
understand IFRS based financial reporting is
therefore call for attention. Studies have been carried
out in the context of Nigeria on the role of audit
committee to the adoption of IFRS (see Delloitte,
2009, 2011).
Thus, the question still remains: how ready are
the audit committees in term of capacity and
knowledge that will enable it contribute significantly
towards the quality of financial reporting in Nigeria?
The objective of this paper therefore is to
examine if the audit committee in Nigeria as presently
constituted is able to understand, interpret and ask
probing questions from the management or external
auditors on IFRS based financial reporting and to find
out necessary steps needed to ensure their
enhancement towards IFRS. To the best of our
knowledge, no study has empirically examined the
readiness of the Nigerian audit committee towards the
17
mandatory adoption of IFRS as we consider in this
study.
2.3 Audit Committee and International Financial
Reporting Standard (IFRS)
The need for integration of audit committee into
global corporate finance is rooted deeply in American
corporate evolution especially the New York Stock
Exchange crash in 1929. The economic depression in
the early thirties had an asymmetrical negative
depreciation of shares. Consequently, several public
companies agreed to tighten their internal and
external audit and financial reporting standards and
need for sound corporate governance to govern the
management, resulting in the creation of audit
committee.
Audit committee membership is a mix of Board
of Directors and Shareholders with a chairperson
selected from among the members. Given the global
trend toward International Financial Reporting
Standards (IFRS), many boards are considering the
implications for their organizations. Directors should
18
examine not only the strategic effects of this shift, but
also what it means in terms of having well-qualified
financial experts with knowledge of IFRS on boards
and audit committees.
The reason is that audit committees have a
fiduciary responsibility to protect the interests of
shareholders and oversee the integrity of the financial
reporting process and they are part of internal audit
system created by public and private companies to
ensure financial regulatory and risk management
compliance of public and private companies to lay
down financial laws and practices (Martin-Kuye,
2010). Their involvement in the transition to IFRS is
essential because of the various roles they perform in
the financial sector in term of ascertaining whether
the accounting and reporting policies of the company
are in accordance with legal requirements and agreed
ethical practices, reviewing the scope and planning of
audit requirements and the findings on management
matters in conjunction with external auditors and
departmental responses thereon.
19
Keep under review the effectiveness of the
company’s systems of accounting and internal
control, make recommendations to the board in
regard to the appointment, removal and remuneration
of external auditors of the company and authorize the
internal auditors to carry out investigations into any
activities of which may be of interest or concern to the
committee.
Despite the duties listed above of the audit
committee, the question is that, how can the audit
committee get acquainted with the issue of IFRS?
There would be need for relevant training of audit
committee on IFRS.
Awotoye (2013) opined that audit committee
should receive relevant training on IFRS to ensure
sufficient level of knowledge for discharging duties
and keep knowledge current. If the audit committee
does not have a sufficient understanding of IFRS to
exercise the appropriate level of oversight, it could
result in the adoption of inappropriate policy
elections. The committee should develop a plan that
20
outlines timely education for all members and should
consider the implication that IFRS could have on the
listing standard’s financial literacy requirements.
Building proficiency will allow audit committee
members to lead a productive dialogue and provide
useful insights in IFRS planning discussions.
Education and training of audit committee will give
them insight to know what is required of them and
put them in a better position to insist on getting high-
quality information sufficiently in advance so that
there can be thorough consideration of the issues
prior to, and informed debate and challenge at, board
and committee meetings (Brooke, 2012).
The audit committee members therefore, require
the knowledge of IFRS in performing their duties, with
the understanding that this information needs
constant refinement. Hence, KPMG (2012) maintained
that despite being vigorously independent, diligent
and knowledgeable, audit committee members will
never be fully effective unless they have both access
to, and an understanding of, all the relevant
21
information on IFRS. It is therefore important for
audit committees to gain an understanding of IFRS.
They should also be prepared to ask members of the
company’s management team specific questions to
determine management’s preparations for the
adoption of IFRS (AICPA, 2010). In addition, the audit
committee should be able to understanding the
financial history of the company and involving in the
planning and implementation of IFRS which will
enhance the ability and capacity of audit committee
in carrying out their functions.
2.4 Financial Statement Effects on IFRS Implementation
The implementation of IFRSs would reduce
information asymmetry and would subsequently smooth
the communication between managers, shareholders,
lenders and other interested parties (Morris and Strawser,
1990), resulting in lower agency costs. Lower information
asymmetry would also lead to lower costs of equity and
debt financing (Ezeani and Oladele, 2012). The benefits of
implementing IFRS include higher comparability, lower
transaction, costs and greater international investment.
IFRS also assist investors in making informed financial
22
decisions and predictions of firm future financial
performance and give a signal of higher quality
accounting and transparency (Tarca, 2004; Tendeloo &
Vanstraelen, 2005). Therefore, IFRSs would tend to
reduce earnings manipulation and enhance stock market
efficiency (Archambault, & Archambault, 2003), while
they would also tend to positively impact on firms’ stock
returns and stock related financial performance measures
(Lin, Hua, Lin, and Lee, 2012).
The adoption of IFRSs tends to enhance
transparency, disclosure and comparability. It is evident
that the implementation of IFRSs reinforces stock market
liquidity and leads to lower cost of capital and transaction
costs, higher market value and better reputation (Leuz,
2003). The higher disclosure requirements and financial
reporting quality that stem from IFRSs imply that the
adoption of IFRS would give a positive signal to investors
as information asymmetry and agency costs tend to
diminish (Tarca, 2004). It appears, therefore, that firms
that adopt IFRSs would tend to display lower potential for
earnings management (Leuz and Verrecchia, 2000;
Ashbaugh, 2001; Ashbaugh and Pincus, ‘2001; Leuz,
2003). Less subjectivity would lead to fewer opportunities
23
to influence reported earnings and bonuses and/or
mislead investors. Hence, in countries with strong
investor protection mechanisms, such as the UK, the
costs of IFRS adoption would tend to be lower because the
level of earnings management is lower as managers are
less inclined to manipulate the reported accounting
figures (Nenova, 2003; Dyck & Zingales, 2004). In
contrast, in countries with weak investor protection
mechanisms, the scope for earnings management would
tend to be higher and the quality of financial reporting
lower, implying that the costs of adopting IFRSs would be
higher.
2.5 Definition and Meaning of Audit Report Quality
One common definition of Audit report quality is
provided by Morris and Strawser (1990). They define
audit report quality as “the market-assessed joint
probability that a given auditor will both (a) discover a
breach in the client’s accounting system, and (b) report
the breach.” The probability that the auditor will report
the detected misstatements is defined by them as auditor
independence. Therefore, according to Morris and
Strawser (1990) definition, Audit report quality is an
increasing function of an auditor’s ability to detect
24
accounting misstatements and auditor independence as
assessed by the market. His definition refers to “market-
assessed” or perceived Audit report quality. When
applying this definition to actual Audit report quality,
there is an underlying assumption that market perceived
Audit report quality reflects actual Audit report quality.
However, many studies (Krishnan, 2003) adopt this
definition without addressing the distinction between
these two different concepts.
Srinidhi and Ferdinand (2009) define audit report
quality in terms of level of assurance. Since the purpose
of an audit is to provide assurance on financial
statements, Audit report quality is the probability that
financial statements contain no material misstatements.
In fact, this definition uses the results of the audit, that
is, reliability of audited financial statements to reflect
Audit report quality. This definition leads to the following
question: “How do financial statement users assess the
level of assurance and reliability of audited financial
statements?” This is a post hoc Audit report quality
definition because the assurance level cannot be assessed
until the audit has been conducted. As a result, Srinidhi
25
and Ferdinand (2009) definition refers to actual Audit
report quality.
Other researchers also have suggested definitions
for Audit report quality. For example, Srinidhi and
Ferdinand (2009) define auditor quality in terms of the
accuracy of information the auditor supplies to investors.
Their definition is similar to the one provided by Srinidhi
and Ferdinand (2009). They provide an Audit report
quality definition that is based on the auditor’s ability to
detect and eliminate material misstatements and
manipulations in reported net income. They suggested
that Audit report quality should be defined on an
engagement-by-engagement rather than on a firm basis.
An important issue regarding the definition of Audit
report quality is whether to distinguish auditor quality
from Audit report quality. Many studies do not make this
distinction and even use the concepts interchangeably.
Under certain conditions, auditor quality and Audit report
quality might be used interchangeably. For instance,
according to assumptions underlying Srinidhi and
Ferdinand (2009) audit report quality definition, when an
auditor provides only one level of quality of audit service,
auditor quality and Audit report quality can be used
26
interchangeably. However, as stated earlier, this
assumption may be problematic. Anecdotal evidence
suggests that all of the largest audit firms have been
associated with audit failures.
Therefore, auditor quality should be defined as the
overall audit service quality of a certain audit firm.
Meanwhile, as Bu-Peow, & Hun-Tong (2003) have pointed
out, Audit report quality should be defined on a service-
by-service basis because an audit firm may not conduct
all its audits with the same level of quality. In other
words, auditor quality is a firm-based concept and Audit
report quality is a service-by-service based concept.
Therefore, it is important to distinguish these two
concepts based on the purposes of different studies. The
current study focuses on the concept of Audit report
quality rather than auditor quality.
Measurement of Audit Report Quality
Despite the significant role of quality audit in
enhancing quality corporate financial reporting,
consensus has not been reached on how Audit report
quality should be measured. It is often perceived that an
unqualified audit opinion describes the quality of audited
financial statements implying that financial statements
27
are free from material misstatements. Some observable
proxies are used for financial statements credibility
expected from high quality audit.
These proxies include earnings response coefficient
and magnitude of the discretionary accrual components of
reported earnings (Bu-Peow, & Hun-Tong, 2003) see Audit
report quality as a function of auditor performance. They
argue that Audit report quality is affected by the ability
and professional conduct of auditors. Hence, auditors’
failure to detect material misstatements or failure to
report the misstatement would reflect poor Audit report
quality. However, the quality of the audit work performed
by auditors is not assessable for scrutiny by financial
statements users because users are not privy to the
working papers of the auditors nor can they observe what
the auditors actually did. The question of what
constitutes an Audit report quality remains unanswered.
Therefore, some other indicators of Audit report quality
have often been adapted to proxy for quality.
Srinidhi and Ferdinand (2009) in her seminal work
concludes that size of audit firm alone can be used as the
proxy for quality. She suggests that the Big 8 (then.)
supply better quality audit compared to the non-Big 8. Big
28
8 audit firms demonstrate the ability to provide quality
audit in two dimensions. The first dimension is the ability
to detect misstatement and the second is the reporting of
the misstatement (Srinidhi and Ferdinand, 2009).
According to Srinidhi and Ferdinand (2009),
auditors’ ability to detect misstatement is a function of
technical competence whereas the willingness to report
the misstatement is a reflection of the auditors’
independence. A crucial attribute of Audit report quality is
therefore the exercise of professional judgments by
auditors in an independent manner because it essentially
enhances the informational value of auditing to third
parties.
However, studies on quality differences between
audit firms provide inconsistent results. For example,
Tsakumis (2007) find that information associated with
&Big 8 firm is perceived to be more reliable. This is
consistent with Morris and Strawser, (1990) who find that
banks receiving modified audit reports by Big 6 are more
likely to be closed by regulators compared to banks
receiving modified audit reports by non-Big 6 firms. These
findings are inconsistent with earlier studies, which find
no significant difference in the audit price of the Big 8 and
29
the non-Big 8. Also, no greater likelihood that smaller
audit firms would issue inappropriate opinions. They
considers audit firm size, firm reputation, expertise and
independence of the audit firm as “noisy” measures of
Audit report quality if taken individually and suggest
therefore that these factors should be combined as a
better measure of Audit report quality.
The following is considered is means of measuring
Audit report quality:
Earnings Quality Measures
Kinney-Kuye (2010) show that auditors have a
pervasive effect on pre-audit earnings. Specifically they
review studies in which authors examine actual audit
work papers to determine which earnings issues were
identified by auditors and whether they were adjusted or
waived. Accordingly it is common to use earnings quality
measures to measure Audit report quality, although as
point out, reported earnings quality is the joint product of
managers and auditors’ behavior. That is, earnings
quality may be high because managers never attempted to
manipulate earnings, even though auditors were willing to
acquiesce in earnings management. Similarly earnings
30
quality could be poor because managers attempted a lot
and auditors prevented much but not all.
Abnormal Accruals
Krishnan (2003) was among the first papers to use
the Jones model abnormal accruals as a measure of Audit
report quality. He refer to Ezeani and Oladele (2012)
review article to justify their use of an earnings-based
measure of Audit report quality.
They use absolute value of discretionary accruals,
whereas Tarca (2004) use signed discretionary accruals.
The evidence reviewed by Martin-Kuye (2010) does
suggest that auditor adjustments typically result in a
decrease in earnings, however, they also report that a
substantial number of auditor adjustments do result in
an increase in earnings. The ratio of earnings decrease to
earnings increase ranges from 1.4 — 1.6 in most of the
studies they reviewed; thus 42 — 38 percent of the
adjustments result in earnings decrease which is a
substantial number.
The use of discretionary accruals is strengthened by
other findings: Krishnan (2003) find that auditors modify
their report (for asset realization uncertainties and going
concern) more often when discretionary accruals are high.
31
Similarly, he finds that litigation is higher when accruals
are high. Martin-Kuye (2003) find that the cross-sectional
Jones model performs better than its time series
counterpart.
Apart from the limitation noted above, that earnings
quality is the joint product of managers and auditors’
decisions, there is another potential limitation of this
measure.
That is the fact that discretion in accruals may be
used by managers to communicate their information as
Oyedele (2011) and Sibel (2013) argue. He argue that
auditors use their professional judgment to determine
whether the financials presented by the clients agree with
the hard facts, as well as auditors’ subjective, non-
quantifiable, soft information. Under this view, auditors
do not indiscriminately minimize accruals; they do so only
when warranted by their soft information argue that
imposing too strict a liability on auditors will induce them
to practice defensive auditing and reporting which may be
less informative).
32
Accrual Quality
A recent alternative that better captures the idea of
professional judgment is the measure of accruals quality.
They model cash flows as accruals plus error. Accruals
are of high quality if the error is low. Thus high-quality
accruals are not necessarily low accruals - they are
accruals that are justified by subsequent cash flow
realizations.
If one could observe the error directly, as is possible
in certain settings such as the property and casualty
insurance industry, it would be easy to measure accruals
quality. In general, however, one cannot. Therefore
Oyedele (2011) measure the error as the residual from a
regression of working capital accruals on current, past,
and future cash from operations. Their measure of
accruals quality is the time-series standard deviation of
residuals from this regression. He extend this measure by
distinguishing innate accruals quality (the component
driven by economic fundamentals such as operating
cycle), from discretionary accruals quality (the residual).
He use discretionary accruals quality as their measure of
Audit report quality, investigating its relation with audit
and non-audit fees. Since the measure is relatively new,
33
it. would help to know how well it correlates with the
known determinants of Audit report quality. An issue with
the measure is that one needs a time-series average to
measure audit report quality.
Restatements
The use restatements of previously reported results
for GAAP violations as their Audit report quality measure.
Restatements are highly indicative of audit failure. The
number of restatements has increased since the mid
1990s, giving much larger sample sizes for studies using
this measure.
Earnings Response Coefficients
Morris and Strawser (1990) used ERC as a measure
of Audit report quality. They argue that more skillful
auditors will bring about better concordance between the
reported numbers and GAAP, and thereby increase the
credibility of the reported numbers: They develop a model
in which ERC5 increase as a function of credibility of the
numbers. Renders and Gaeremynck (2007) also use ERCs
as a measure of perceived Audit report quality, i.e.,
independence in appearance. Some research design
choices differ: they calculate annual ERCs as the sum of
34
coefficients on earnings level and changes in a regression
with market-adjusted returns as the dependent variable.
Both Tarca (2004) and Sibel (2013) use ERC as a
measure of perceived Audit report quality, and Tarca
(2004) in particular use it in a context where they
explicitly wish to differentiate independence in
appearance from independence in fact. It could be a
measure of auditor independence in fact if one assumes
that stock market perceptions are right on average.
Non Earnings Measures
Going Concern Qualification
One of the most common non-earnings-based a
measure is the propensity to issue going concern
qualifications. As Tarca (2004) point out, this is a direct
measure, i.e., unlike earnings quality which is a joint
product of managers’ and auditors’ actions. However, it
too is unlikely to reflect Audit report quality for a broad
cross-section of firms.
Internal Control Studies
SOX 404 required auditors to report on the quality
of internal controls. Several studies have looked at it.
35
Other Approaches
Audit fees have been used to infer Audit report
quality-Renders and gaeremynck(2005)-but it is not clear
that better auditors would charge more (Stein and
Cadman 2007). The early literature began by using
measures of IPO under pricing-Beatty (2009). Also, Tarca
(2004) shows that Non-Big-8 have higher litigation despite
Big 8 being more attractive for lawsuits. He look for stock
price reaction to change from Non-Big-8 to Big 8 auditor
(and finds nothing). But Tarca (2003) shows that reaction
to change depends on pre-change auditor opinion.
2.6 Review of Empirical Literature
Nyor (2012) expresses fears that the credibility
crises suffered by financial statements of Nigerian firms
may deepen in view of the flexibility that IFRS allows.
They conclude that Nigerian companies should converge
to IFRS in view of the fact that it will enhance better
accountability and transparency and improve quality of
reporting, despite its cumbersomeness and the initial
anticipated problems.
Ezeani and Oladele (2012) examined the extent to
which adoption of international financial reporting
standards (IFRS) can enhance financial reporting system
36
in Nigerian Universities. The findings indicated that there
are a lot of accounting areas the accountants and
auditors should focus in discharging their duties. And as
well a lot of implications are also involved. Mostly
accountants, auditors, bursars, financial analyst, etc, are
the personnel involve in the IFRS financial instruments.
Demaki (2013) conclude that the goal of financial
reporting is to make information available for decision
making. Historically, there is diversity in financial
reporting in different countries due to culture, legal
systems, tax systems and business structures.
International financial reporting standards (IFRS)
harmonizes this diversity by making information more
comparable and easier for analysis, promoting efficient
allocation of resources and reduction in capital cost.
Rational utility maximization is the theoretical foundation
on which this paper is rooted. The IFRS components are
disclosed, the benefits and challenges together with the
roadmap of its adoption in Nigeria are highlighted for the
economic development of Nigeria.
Ikpefan and Akande (2012) looks at the benefits of
adopting IFRS, obstacles and intrigues expected from the
implementation of IFRS. They also analyzed the
37
requirements that would assists in the implementation of
IFRS in Nigeria. Using content analysis method, they
recommend that a continuous research in order to
harmonize and converge with the international standards
through mutual international understanding of corporate
objectives and the building of human capacity that will
support the preparation of financial statements in
organization.
Abdulkadir (2012) focused on the adoption process
of International Financial Reporting Standards (IFRS) on a
developing economy, with particular reference to Nigeria.
The study is based on the data obtained from literature
survey and archival sources in the context of the
globalization of International Financial Reporting and the
adoption of International Financial Reporting Standards
(IFRS). Nigeria has embraced IFRS in order to participate
in the benefits it offers, including attracting foreign direct
investment, reduction of the cost of doing business, and
cross border listing. In implementing IFRS Nigeria will
face challenges including the development of a legal and
regulatory framework, awareness campaign, and training
of personnel.
38
Lin, Hua, Lin and Lee (2012) investigate the
converge impacts on reporting quality over 1999 to 2009,
which divided into three timeframes: the U.S. GAAP-based
era ranging from 1999-2005, the IFRS convergence era
ranging from 2006-2007, and the preparation period of
IFRS adoption ranging from 2008-2009. Two criteria of
reporting quality is included: value relevance and the
magnitude of earnings management. The empirical results
show that the financial reporting quality got improvement
under the amendment towards IFRS adoption.
Ojo (2012) conclude that improved transparency
and comparability of accounting and financial
information, as well as other benefits of high quality
standards which should be derived from the adoption of
IFRS: benefits such as improved attributes of information
(such as relevance, reliability, understandability), will
certainly ensure that users of financial information benefit
from better decision making as well as restoring the
confidence of investors in the aftermath of economic,
capital market and financial crises, which have damaged
the credibility of audits, and financial reporting.
39
Isenmila and Adeyemo (2013) examine the perceived
impact of Nigerian institutional infrastructure (i.e.
Educational Institution, Professional Accounting Bodies,
Legal Framework, SEC and NASB or FRCN) on the
mandatory adoption of IFRS, which took effect from
January 2012. The study adopts the questionnaire survey
method to seek respondents’ views on the subject matter.
One of the major perceived differences between IFRS and
Nigerian SAS is that the former allegedly provides more
discretion (i.e., less specific standards and less
implementation guidance). Although more reporting
discreetness is not necessarily a challenge, firms’
reporting incentives, which are shaped by Nigerian
institutional framework, play a foremost role in how
organizations would apply the discernment under IFRS.
They therefore employed Multiple Regression techniques
as well as One Way Repeated Measure Analysis of
Variance, in testing the two hypotheses in the study. The
result shows that four of the five institutions are ready
and strong enough to support the mandatory adoption of
IFRS.
40
Sibel (2013) investigates the value relevance of
accounting information in pre- and post-financial periods
of International Financial Reporting Standards’ (IFRS)
application for Turkish listed firms from 1998 to 2011.
The results show that value relevance of accounting
information has improved in the post-IFRS period (2005-
2011) considering book values while improvements have
not been observed in value relevance of earnings.
2.7 The Effect of IFRS Adoption on Financial Disclosure
It is widely accepted that accounting is the language
of business that enables communication among financial
information users and providers. Just as each nation has
its own language, not surprisingly, different countries
have different accounting standards. Lainez and Gasca
(2006) among others, argue that social, political, economic
and cultural environment of each country influence
national accounting systems. The success of convergence
of accounting standards depends to large extent on the
sufficient understanding of the underlying reasons of
national accounting differences.
41
Previous research on classification of countries
according to accounting rules and practices shows that
there are certain clusters that differ in terms of
measurement and disclosure practices (Nobes 2003;
Doupnik and Salter, 2003). Nobes (2003) and Doupnik
and Salter (2003)’s classification studies report two
general clusters: Micro level countries under the influence
of Anglo-American practices and macro level countries
under the influence of Continental Europe practices.
Furthermore, Doupnik and Salter (2003) report
more variety in accounting practices among macro level
countries which in turn may impede the achievement of
convergence in these countries. Increase in cross country
capital transfers and foreign direct investments evolved
the necessity of eliminating or minimizing the differences
in accounting standards to enhance comparable financial
information globally. Within this framework, convergence
of financial reporting standards globally becomes one of
the major tasks of accounting standard setters. Financial
statements that are prepared in accordance with similar
accounting standards are expected to improve
comparability, and thus investors would be able to
decrease investment risks by global diversification
42
(Doupnik & Perera, 2007). Although both preparers and
users agree upon the benefits of similar accounting
standards, some still argue that because of the
environmental differences among the companies,
convergence is hard to achieve. International Accounting
Standards Board (IASB) leads the global convergence
movement. IASB has no enforcement power on the use of
IFRS, but the International Organization of Securities
Commission’s (IOSCO) endorsement of IASB standards
has assisted in the implementation of those standards in
different countries. Furthermore, EU required the
companies that are traded in the stock exchanges to apply
IFRS in preparation of consolidated financial statements
effective from 1 January 2005. Along with the EU many
other countries such as Australia, New Zealand, South
Africa, and Turkey have taken steps to use IFRS as their
national accounting standards or revised their national
standards to adapt IFRS. Convergence of IFRS and United
States generally accepted accounting standards (US
GAAP) is also an ongoing project which is expected to be
completed by mid-2011 (Financial Accounting Standards
Board, 2010).
43
Okere (2009) study accounting within three
functions: measurement, disclosure and auditing. Among
these, this study focuses on financial disclosure which
helps to achieve the goal of communicating financial
information to decision makers. Previous studies
investigate the underlying reasons for different disclosure
levels among companies and find that different
environmental factors including cultural dimensions
affect disclosure levels. He defines culture as the collective
programming of the mind that differentiates one member
of a group or society from the others. He groups cultural
values in four dimensions as:
1. Individualism versus Collectivism: In individualistic
societies the dependence of individuals among each other
is low; individuals are independent and self- sufficient. At
the other extreme, in the collectivist societies that score
low in individualism scale, collaboration among members
of society is higher and there are strong cohesive in-
groups.
2. High Power Distance versus Low Power Distance:
Power distance demonstrates the acceptance of equality
and describes how inequality is perceived in a society. In
high power distance societies, people accept hierarchy
44
without questioning. However, in low power distance
society’s unequal power thus hierarchy is not accepted as
it is.
3. High Uncertainty Avoidance versus Low Uncertainty
Avoidance: It is a measure of peoples discomfort arising
from uncertainties. Societies with high uncertainty
avoidance scores prefer to have rules and try to avoid
foggy environment in which they feel threatened.
4. Masculinity versus femininity: Masculine cultures are
more assertive and gender differences are more
emphasized. Consequently, individuals are more success
oriented and material in masculine societies. On the other
hand, social welfare and care for others are more
important in feminine societies. In a later study he
identified a fifth value dimension as Long-term
Orientation versus Short-term Orientation which he
defined as the extent to which people favor a pragmatic
future oriented perspective- fostering virtues like
perseverance and thrift-over short-term thinking (as cited
in Ding et al., 2005). This cultural dimension has not
found as acceptance as the others, especially in
accounting, and thus is not included in this study. Gray
(2008) formulates an “accounting value model” baaed on
45
Hofstedes cultural dimensions and proposes four
accounting values; Professionalism versus Statutory
Control; Uniformity versus Flexibility; Conservatism
versus Optimism; Secrecy versus Transparency. Salter
and Niswander (2005) test the theory developed by Gray
(2008) by linking the accounting values and the Hofstedes
cultural dimensions.
Among the accounting values, Secrecy versus
Transparency is related with financial disclosure, thus the
following paragraphs summarize the expected relations
among cultural dimensions and Secrecy versus
Transparency as developed by Gray (2008) and the
findings of studies that investigate the relation between
cultural dimensions and financial disclosure.
i. There is less secrecy and more competition in
individualistic societies: Individualistic societies
demand accountability and require extensive disclosure
relative to collectivist societies. Accordingly a negative
relation is proposed between secrecy and individualism.
In other words, a positive correlation with individualism
scores and financial disclosure is expected. Salter and
Niswander (2005) report a significant negative relation
between secrecy and individualism. Zarzeski (2006)
46
investigates the effect of culture and financial disclosure
in French, German, Hong-Kong, Japanese, Norwegian,
British and US companies. Her findings show that there is
a positive relation between individualism and
financial disclosure. Companies that are members of
individualistic countries disclose more information.
Archambault and Archambault (2003) use Center for
International Financial Analysis and Research (CIFAR)s
evaluations of corporate disclosure levels from more than
40 countries in the first half of the 1990”s and their
findings support the positive relation as well.
ii. There is a negative correlation between power
distance scores and financial disclosure: Okere (2009)
proposes that power distance is positively related with
secrecy, as less information is expected to preserve power
inequalities. However, He report positive relation between
financial disclosure and power distance. Archambault and
Archambault (2003) find contradictory results and note
the negative relation between disclosure and power
distance. Sibel (2013) do not find significant relation
between power distance and financial disclosure. Thus,
research relating to this relation does not provide
conclusive results.
47
iii. There is positive relation between secrecy and
uncertainty avoidance: Okere (2009) proposes that
secrecy is positively related with uncertainty avoidance, as
less information is expected to preserve security and avoid
conflict and competition. In other words, a negative
correlation between uncertainty avoidance and financial
disclosure is expected. Tarca (2004) find significant
positive relationship between secrecy and uncertainty
avoidance i.e. there is less financial disclosure in strong
uncertainty avoidance counties. Furthermore, according
to Santema, Hoekert, van de Rijt and van Oije (2005),
societies with low uncertainty avoidance scores would
have more detailed reporting rules (as cited by Saad
2006). Zarzeski (2006), Jaggi and Low (2000) and Hope
(2003) all report negative relation between uncertainty
avoidance and disclosure. On the other hand
Archambault and Archambault (2003) determine positive
relation between uncertainty avoidance and financial
disclosure. Again, there is lack of consensus in the
direction of relation.
iv. There is negative relation between masculinity and
secrecy: Okere (2009) hypothesizes that the lower a
country ranks in masculinity; it is more likely that it
48
ranks high in secrecy. More caring societies (i.e. feminine
societies) will tend to be more open especially in
disclosure of socially related information. Furthermore,
He proposed that in masculine societies such as
Germany, disclosures would include more economic and
financial information, whereas in feminine societies, such
as Sweden, social aspects would be emphasized in
disclosures (as cited in Ikpenfan and Akande, 2012).
According to him, masculine societies are more
competitive and competition requires reduced costs, for
that reason she expects a positive relation between
masculinity and financial disclosure. Her findings support
her expectations. On the other hand, Archambault (2003)
determine a negative relation between masculinity and
financial disclosure. However, Krishnan (2003) not find
significant relation between secrecy and masculinity.
Studies that investigate joint dimension
demonstrate that collectivist and high power distance
societies prefer secrecy and tend to disclose information
only to those who have direct managerial and financial
responsibilities. In another line Dyck and Zingales (2004)
also investigate the impact of culture on financial
disclosure in Common and Code Law countries. Their
49
findings suggest that culture do not influence the level of
disclosure in Common Law countries but it is an
important factor in Code Law countries.
50
CHAPTER THREE
RESEARCH METHOD AND DESIGN
3.1 Introduction
This chapter deals with the various models
employed in both collection and analysis of data used in
this study. Research methodology reviews the methods,
procedures, or even modalities by which the research
work hopes to accomplish its objectives. It involves the
appraisal of the design of the study, explaining the
various methods employed in the collection as well as the
analysis of data.
3.2 Research Design
The research design is a guide showing how the data
or information regarding a research problem is to be
collected and analyzed within the research setting and
economy of time and materials.
For the purpose of this study, survey research
design was adopted. The survey research design involves
the use of questionnaires which was personally
administered to the respondents by the researcher. The
survey research design was adopted in this study over the
other methods because of its originality.
51
The survey method was employed in order to elicit
information from the various staff of the selected
companies quoted in the Nigeria Stock Exchange. The
survey method was adopted because surveys are relatively
inexpensive (especially self- administered surveys). Very
large sample are feasible, making the result statistically
significant even when analyzing multiple variable. High
reliability is usually, easy to obtain. Survey provides more
honest responses than other types of research
methodology.
3.3 Description of Population of the Study
The population is made up of all conceivable
elements, subjects or observations relating to a particular
phenomenon of interest to the research. Yomere and
Agbonifoh (2009), defined the population of a study as “a
group about which we want to be able to draw
conclusion”. It is the totality of the objects or elements
being studied, and to which conclusions of the research
results apply.
The total population for this study is entire
companies quoted in the Nigeria Stock Exchange.
52
3.4 The Sample Size
One of the challenges of sampling is the
determination of the sample size; that is, the number of
elements from the population to be included in the
sample. Opinions may vary concerning the number of
elements to be selected or the proportion of the population
to be included in a given sample.
To the end, a total of one hundred (100) staff was
randomly selected from the sampled companies.
3.5 Sampling Technique
The simple random sampling technique was
used to ensure geographical spread and
representative all the staffs of the foreign banks were
sampled.
3.6 Sources of Data Collection
In view of the need to utilize accurate data for this
research, primary data were obtained through a
structured questionnaire to elicit responses from
respondents to meet the requirements of this research.
The data for the foregoing study were obtained from
primary source. The primary (data was the major source
which comprised questionnaires which were administered
to the respondents.
53
3.7 Method of Data Presentation
The research instrument for this study is the 5-
scales liket-type questionnaire. It is a special type of
multiple choice questions suitable for obtaining the
respondents, evaluation assessment of an object.
The likert-type question indicates the extent to
which the respondents agree or disagree with a given
statement. The answer range from strongly agreed,
agreed, undecided disagreed slightly and strongly
disagreed. In this study, 100 questionnaires are
administered to respondents comprising of management
and non-management staff of some selected companies
quoted in the Nigeria Stock Exchange.
The questionnaire was constructed in a way to elicit
responses as much as possible to the questions bearing in
mind the need to avoid measurement error, surrogate
information error and make for high response rate.
The questionnaire was sectioned into section A and
B. Section A had questions one to five end contained
questions regarding the bio-data of the respondents.
Section B had questions 6-20 and contained questions
directly relevant to the research and it is thus the main
body of the questionnaire.
54
The “Likert-type” scale was used throughout the
questions; this was not only to allow for a measurement of
the direction of responses but also for the intensity of
responses.
3.8 Method of Data Analysis
The data obtained for this study will be presented in
tabular form and analyzed by the use of simple
percentage to enhance quick and easy understanding.
In testing the stated hypothesis in Chapter one of
this study, Z-test will be used.
The formula is stated below:
Z = x – npo
npo (1 – po)
Where:
Z = Symbol used to denote z-test
X = Number of positive response received
n = Number of response analyzed
O = Critical value of the level of significance
55
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
This chapter deals with the presentation and
analysis of data collected and collated during the course
of this study. It consists of the analysis and results of
data using the statistical tool as described in chapter
three of this study, through testing of the relevance of the
stated hypotheses and research questions in the chapter
one in relation to the theme of this project work.
Analytical instruments which were applied include
percentages and averages, being operational tools used in
analyzing questionnaire obtained from the field.
The results will be presented in two ways. The first
shall be the analysis of the descriptive statistics and the
second part will involve the use of z-test to test the
hypotheses stated earlier in this study.
4.2 Data Presentation
This involves the use of tables to analyze the
responses of respondents and their respective
percentages. Out of one hundred (100) questionnaires
administered only 95 were retrieved from the respondents.
This represents 95% (percent) response.
56
4.3 Data Analysis
These are analyzed below:
Section A: Personal Data
Table: 4.1: Sex Distributions of the Respondents.
Sex Number Percentage

Male 65 68
Female 30 32
Total 95 100
Source: Field Survey, 2015
Table 4.1 above shows that 68% of the respondents
were males and 32% were females.
Table 4.2: Educational Qualification Distribution of
the Respondents
Qualification Number Percentage

SSCE/WASC 16 17
OND/Diploma 20 21
HND/1st Degree 4 44
2nd Degree 12 13
Ph.D 4 5
Total 95 100
From the table above, 17% of the respondents
posses SSCE/WAEC, 21% holds OND/Diploma, 44% are
HND/1st degree holders, 13% possess 2nd degree while
only 5% holds Ph.D.
Table 4.3: Working Experience
57
O – 5 years 21 22
6 – 10 years 16 17
11 - l5 years 35 36
16 - 20 years 18 19
21 years and above 5 6
Total 95 100
Table 4.4: Marital status

Single 49 51
Married 21 22
Divorced 15 16
Widow/widower 10 11
Total 95 100
Source: Field survey, 2015
Table 4.5: Position in the organization

Management staff 35 37
Non-Management staff 60 63
Total 95 100
Section B
Table 4.6:
58
Question 6: The complexity and structure of IFRS will
have positive impact on audit report quality
Options No. of Response Percentage (%)

Strongly agree 47 48
Agree 23 24
Undecided 6 7
Disagree 11 12
Strongly disagree 8 9
Total 95 100
Source: Field Survey, 2015.
From the responses, 48% of the respondents

strongly agreed, 24% Agreed, 7% were undecided, 12%
disagree, while 9% strongly disagree that the complexity
and structure of IFRS will have positive impact on audit
report quality.
Table 4.7:
Question 7: There is a positive relationship between

adoption of IFRS and audit reports quality in Nigeria.
Agree 21 22
Undecided 8 9
Disagree 12 12
Total 95 100
The above table shows that, 47% of the respondents
disagree, while 10% strongly disagree that there is a
59
positive relationship between adoption of IFRS and audit
reports quality in Nigeria.
Table 4.8:
Question 8: There is a significant relationship between

Agree 24 25
Undecided 10 11
Disagree 20 21
Total 95 100
The table depict that, 36% of the respondents
significant relationship between adoption of IFRS and
credibility of audit report.
Table 4.9:
Question 9: The implementation of IFRSs would reduce
information asymmetry and enhance communication
between managers and other stakeholder.
60
Agree 26 27
Undecided 6 7
Disagree 14 15
Total 95 100
Table 4.9 shows that, 42% of the respondents
disagree, while 10% strongly disagree that the
implementation of IFRSs would reduce information
asymmetry and enhance communication between
managers and other stakeholder.
Table 4.10:
Question 10: The adoption of IFRS is likely to exhibit a
favourable impact on audit report quality.

Agree 35 37
Undecided 10 11
Disagree 15 16
Total 95 100
61
The responses shows that, 22% of the respondents
disagree, while 14% strongly disagree that the adoption of
IFRSs is likely to exhibit a favourable impact on audit
report quality.
Table 4.11:
Question 11: IFRS are shareholder-oriented and
encourage the fair value approach to audit report
presentation.

Agree 24 25
Undecided 10 11
Disagree 20 21
Total 95 100
The above table shows that, 36% of the respondents
disagree, while 7% strongly disagree that IFRS are
shareholder-oriented and encourage the fair value
approach to audit report presentation.
Table 4.12:
Question 12: Audit report under JFRS is likely to exhibit
higher value relevance.
62
Agree 20 21
Undecided 8 9
Disagree 13 14
Total 95 100
disagree, while 14% strongly disagree that audit report
reported under IFRSs are likely to exhibit higher value
relevance.
Table 4.13:
Question 13: IFRS tends to enhance transparency,
disclosure and comparability of audit reports.

Agree 35 37
Undecided 10 11
Disagree 15 16
Total 95 100
disagree, while 14% strongly disagree that, IFRS tends to
63
enhance transparency, disclosure and comparability of
audit reports.
Table 4.14:
Question 14: IFRS will give its standards an authority
and credibility that cannot be equaled by any other set of
local standards.

Agree 20 21
Undecided 8 9
Disagree 13 14
Total 95 100
disagree, while 7% strongly disagree that IFRS will give its
standards an authority and credibility that cannot be
equaled by any other set of local standards.
Table 4.15:
Question 15: The adoption of IFRS in Nigeria will create
opportunities for a broader financial transformation for
companies in Nigeria.

Agree 24 25
64
Undecided 11 12
Disagree 14 15
Total 95 100
disagree, while 18% strongly disagree that the adoption of
IPRS in Nigeria will create opportunities for a broader
financial transformation for companies in Nigeria.
Table 4.16:
Question 16: IFRS will assist investors in making
informed financial decisions and predictions of firm’s
future financial performance.

Agree 15 16
Undecided 5 6
Disagree 22 23
Total 95 100
65
disagree, while 19% strongly disagree that IFRS will assist
investors in making informed financial decisions and
predictions of firm’s future financial performance financial
decisions and predictions.
66
Table 4.17:
Question 17: There is a significant relationship between
adoption of IFRS and credibility of financial statement.

Agree 20 21
Undecided 8 9
Disagree 13 14
Total 95 100
credibility of financial statement.
Table 4.18:
Question 18: IFRS is likely to reduce the scope for audit

report quality.
Agree 24 25
Undecided 10 11
Disagree 20 21
Total 95 100
67
disagree, while 7% strongly disagree that JFRS is likely to
reduce the scope for audit report quality.
Table 4.19
Question 19: Professional bodies are adequately training
their members on the technicalities of IFRS impact on

Agree 20 21
Undecided 8 9
Disagree 13 14
Total 95 100
disagree, while 7% strongly disagree that professional
bodies are adequately training their members on the
technicalities of IFRS impact on audit report quality.
Table 4.20:
68
Question 20: Harmonization of the accounting standard
can reduce the level of earnings management and improve
Options No. of Response Percentage %)

Agree 21 22
Undecided 8 9
Disagree 12 12
Total 95 100
disagree, while 10% strongly disagree that harmonization
of the accounting standard can reduce the level of
earnings management and improve audit report quality.
4.4 Test of Hypothesis
The Binomial (Z) test was used to test the claims
made by the researcher in this study. In this research
work, three (3) hypotheses were formulated in chapter one
which are now being tested with the use of the Z-test
statistical technique.
The formula is stated below:
Z = x – npo
npo (1 – po)
Where:
69
Z = Symbol used to denote z-test
x = Number of positive response received
n = Number of response analyzed
O = Critical value of the level of significance
The level of significance used in this test is 5% or
0.05.
Decision Rule
If the calculated value of z is greater than z, at table
value, we reject the null hypothesis and accept the
alternative hypothesis.
Hypothesis One
Ho: There is no positive relationship between adoption of
H I: There is a positive relationship between adoption of
IFRS and audit reports quality in Nigeria
In analyzing the above hypothesis, question seven
(7) of the questionnaire was used.
Q.7: There is a positive relationship between adoption of
Table 4.3.1: Analysis of Respondents

Agree 21 22
Undecided 8 9
Disagree 12 12
70
Total 95 100
Using Binomial P, the null hypothesis (Ho) as
regards the above table is tested using one tail test as
follows:
Ho: P < 0.5
Hi: P > O.5
Zcal is computed using
Z = x – npo
npo (1 – npo)
Z = 66 – 95 x 0.5
95 x 0.5(1 – 0.5)
Z = 66 – 47.5
47.5 x 0.5
Z = 18.5
23.75
Z = 18.5
4.87
Zcal = 3.79
Decision
Since Z cal is 3.79 is greater than Z value at 5%
which is 1.645, (we reject the null hypothesis) accept the
alternative hypothesis, which means that there is a
positive relationship between adoption of IFRS and audit
reports quality in Nigeria.
Hypothesis Two
71
In analyzing the above hypothesis, question eight (8)
of the questionnaire was used.
Q.8: There is a significant relationship between adoption

Agree 24 25
Undecided 10 11
Disagree 20 21
Total 95 100
Using Binomial P, the null hypothesis (Ho) as
regards the above table is tested using one tail test as
follows:
Ho: P < 0.5
Hi: P > O.5
Z = x – npo
npo (1 – npo)
Z = 59 – 95 x 0.5
72
95 x 0.5(1 – 0.5)
Z = 59 – 47.5
47.5 x 0.5
Z = 11.5
23.75
Z = 11.5
4.87
Zcal = 2.36
Decision
credibility of audit report.
Hypothesis Three
adoptions of IFRS financial statement.
H I: There is a significant relationship between adoptions
of IFRS financial statement.
In analyzing the above hypothesis, question
seventeen (17) of was used.
73
Q. 17: There is a significant relationship between
adoptions of IFRS financial statement.

Agree 20 21
Undecided 8 9
Disagree 13 14
Total 95 100
Using Binomial P, the null hypothesis (Ho) as regards the
above table is tested one tail test as follows:
Ho: P < 0.5
Hi: P > O.5
Z = x – npo
npo (1 – npo)
Z = 69 – 95 x 0.5
95 x 0.5(1 – 0.5)
Z = 58 – 47.5
47.5 x 0.5
Z = 20.5
23.75
Z = 20.5
4.87
Zcal = 4.20
Decision
74
credibility of financial statement.
75
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1 Introduction
This study was carried out to examine the adoption
of IFRS on audit report quality in Nigeria. In this section,
the study will discuss the summary of the finding,
conclusions and recommendations.
5.2 Summary of Findings
Based on the statistical test (Z – Test) used in the
testing of the hypotheses, it was observed that;
i. There is a positive relationship between adoption of IFRS
and audit reports quality in Nigeria.
ii. There is a significant relationship between adoption of
IFRS and credibility of audit report.
iii. There is a significant relationship between adoption of
IFRS and credibility of financial statement.
5.3 Conclusion
This research work has shown that IFRS adoption
will have a positive effect on audit report quality.
Adequate awareness have been created on IFRS among
auditors, the study has been able to examine the benefits
of IFRS adoption on the audit report quality.
76
International financial reporting standards (IFRS) is
a set of international accounting standards relating how
particular types of transactions and events should be
reported in financial statements. It is now clear that IFRS
adoption will make international comparison as easy as
possible. Though there were some limiting factors, the
research work still turned out successful.
5.4 Recommendations
In view of the findings of this research, the
researcher recommends that:
i. There should be more emphasis on awareness of IFRS
adoption among accountants/auditors in Nigeria. This
could be achieved by using the print media, radio and
television. The publicity should be aimed at explaining the
benefits the nation can derive by adoption IFRS.
ii. More seminars and workshops should be organized for
these accountants/auditors so as to acquaint them on
how IFRS works.
iii. Government should also not hold back financially in
sponsoring the successful organization of these seminars
and workshops. This will go a long way in improving the
efficiency of IFRS awareness. These seminars should be
organized regularly to ensure that these
77
accountants/auditors up to date with the changing
circumstances regarding IFRS.
iv. The FRCN (Financial Reporting Council of Nigeria) should
be more equipped to enable them conduct adequate
awareness and compliance with IFRS and they should
further explain the similarities and differences between
IFRS and GAAP.
78
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83
APPENDIX I
Department of Accountancy,
Auchi Polytechnic, Auchi.
20th July, 2015.
Dear Sir, Madam,
REQUEST FOR YOUR CO-OPERATION IN COMPLETING

THIS QUESTIONNAIRE
I am a final year student in Auchi Polytechnic, Auchi, as

part requirements of my HND Programme. I am undertaking a
study on Adoption of IFRS on Audit Report Quality in Nigeria.
Therefore, your organization is used as a case study in
order to obtain all necessary information for the project. It will
be highly appreciated if the questionnaire could be answered at
your earliest convenience, therefore, be assumed that
information given in this questionnaire will be treated in strict
confidence and used for the stated academic purpose only.
Thanks for your corporation.
Yours faithfully,
Obadoni Blessing Uwam
84
APPENDIX II
QUESTIONNAIRE
SECTION A
Instruction: Please tick appropriately in the box/column
as [  ].
Section A: Personal Data
1. Sex
a. Male [ ]
b. Female [ ]
2. Education Qualification
a. SSCE/WASC [ ]
b. OND/Diploma [ ]
c. HND/1st Degree [ ]
d. 2nd Degree [ ]
e. Ph.D. [ ]
3. Work Experience
a. 0 – 5yrs [ ]
b. 6- l0 yrs [ ]
c. 11 – l5yrs [ ]
d. 16 – 20yrs [ ]
85
e. 21 yrs and above [ ]
4. Marital Status
a. Single [ ]
b. Married [ ]
c. Divorced [ ]
d. Widowed [ ]
5. Position in the organization
a. Management staff [ ]
b. Non-management staff [ ]
Section B
Key:
AS = Agreed strongly
A = Agreed
U = Undecided
DS = Disagreed slightly
SD = Strongly disagreed
S/N Items AS A U DS SD
The complexity and structure of IFRS
6. will have positive impact on audit report
quality
There is a positive relationship between
7. adoption of IFRS and audit reports
quality in Nigeria
8. There is a significant relationship
86
between adoption of IFRS and credibility
of audit report
The implementation of IFRSs would
reduce information asymmetry and

9.
enhance communication between
managers and other stakeholder

The adoption of IFRSs is likely to exhibit
10. a favourable impact on audit report
quality
IFRSs are shareholder-oriented and
11. encourage the fair value approach to
audit report presentation

Audit report reported under IFRSs are
12.
likely to exhibit higher value relevance
IFRS tends to enhance transparency,
13. disclosure and comparability of audit
reports
IFRS will give its standards an authority
14. and credibility that cannot be equaled
by any other set of local standards

The adoption of IFRS in Nigeria will
create opportunities for a broader

15.
financial transformation for companies
in Nigeria
IFRS will assist investors in making
informed financial decisions and

16.
predictions of firm’s future financial
performance
87
There is a significant relationship
17. between adoption of IFRS and credibility
of financial statement
IFRS is likely to reduce 4he scope for
18.
audit report quality
Professional bodies are adequately
training their members on the

19.
technicalities of IFRS impact on audit
report quality
Harmonization of the accounting
standard can reduce the level of

20
earnings management and improve
audit report quality
88

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ADOPTION OF IFRS ON AUDIT REPORT

OBADONI BLESSING UWAM

A PROJECT WORK SUBMITTED TO THE

IN PARTIAL FULFILLMENT OF THE

This is to certify that this work was carried out by

OBADONI BLESSING UWAM of the Department of Accountancy,

Auchi Polytechnic, Auchi, Edo State.

It is adequate in scope and quality for the requirement for

the award of Higher National Diploma (HND) in Accountancy.

This project work is dedicated to MRS. EMILLIA

OBADONI OSAKWE, thank you for being my mom and my dad.

First and foremost, I express my gratitude to God

Almighty for seeing me through my programme.

I am exceedingly appreciative to my supervisor; MR. M. M.

ALIU whose guidance and correction of errors serve as a source

of impact to this project.

The study tends to enhance transparency, disclosure and

1.1 Background to the Study

Accounting is the language of business while

financial reporting is the medium through which the

language is communicated. Accounting and financial

reporting are regulated by Generally Accepted Accounting

Principles (GAAP) comprising of accounting standards,

company law, stock market regulations, and so on. GAAP

for accounting and financial reporting gives answers to

differences in business communication between

countries. The global GAAP that is seeking to uni1

accounting and financial reporting world is the

International Financial Reporting Standards (IFRS) issued

by the International Accounting Standards (IASs;

International Financial Reporting Standards (IFRSs);

Standing Interpretations Committee (SIC5)

pronouncements; and International Financial Reporting

Interpretations Committee (IFRICs) guidelines (Ikpefan

and Akande, 2012).

Essien-Akpan (2011) opine that financial report

apart from stating the financial position of an

organization, provides other information such as the value

enterprise within a defined period time to which it relates.

This information is useful to a wide range of users making

informed economic decisions. The quality of financial

reporting is indispensable to the need of users who

requires them for investment and other decision making

purposes. Financial reports can only be regarded as

useful if it represents the “economic substance” of an

organization in terms of relevance, reliability,

comparability and aids interpretation simplicity. He

further stated that useful accounting information derived

from qualitative financial reports help in efficient

allocation of resources by reducing dissemination of

information asymmetry and improving pricing of

securities. To prepare and audit financial statements,

some accounting convention and principles known as

standards have been put in place by appropriate bodies

set up for the purpose to encourage uniformity and

reliability. They added that, the implementation of IFRS

would reduce information irregularity and strengthens the

communication link between all stakeholders. It also

reduces the cost of preparing different version of financial

statements where an organization is a multi-national.

regarding preparation and presentation of financial

statements as well as auditing same are not left to whim