ABSTRACT

This study examined the impact of the adoption of the International Financial Reporting Standards (IFRS) on earnings management in quoted manufacturing companies in Nigeria. Published Financial statements prepared under the Nigerian Statements of Accounting Standards (SAS) and the restated financial statements using IFRS guidelines for 20 quoted companies were used for the study. Discretionary accruals were employed as earnings management variable, while, leverage, cash flow, growth, return on assets (ROA), size and loss were performance proxies. The t -test statistic was used to test the impact of the adoption of IFRS on earnings management, while, multiple regression was conducted to examine the relationship between earnings management and performance. Multi-collinearity tests conducted revealed that the correlation among the variables were not strong enough to distort the result of the multiple regression. The results showed that the decrease in earnings management after the adoption of the IFRS was not statistically significant. The results also revealed that the relationship between earnings management and financial performance of manufacturing companies in Nigeria is significant before and after the adoption of the IFRS. The study unveiled the fact that accounting standards on their own do not improve quality of financial reports. It was recommended that there should be increased education of managers on IFRS guidelines and adoption.

Keywords:       IFRS, Earnings management, Discretionary Accruals, Performance

INTRODUCTION

The picture of how well a firm has performed can be derived from the evaluation of information contained in accounting reports of the firm. Managers, therefore, owe it a duty to the various stakeholders especially, investors to prepare accounting reports that express the true and fair view of the business transactions for the period specified. According to the BPP Learning Media (2012), financial reports represent economic phenomena in words and numbers that must faithfully represent relevant phenomena that it purports to represent.

Sometimes, however, when businesses are doing badly managers are tempted to use accounting techniques to enhance the apparent performance of the firm in an unjustified way (Jones & Jones 2011). Managers exploit flexibility in accounting rules which allows them to determine the direction of accounting reports by adopting accounting policies that serve the interest of management. This is one of the reasons why different accounting information can be generated from the same business data when the accounting numbers are manipulated.

The manipulation of accounting information to achieve a desired purpose is earnings management.

Jawad and Xia (2015) described earnings management as a form of creative accounting. Earnings management involves taking deceptive steps to present financial statements that suits or protects management interests. According to Akhgar (2012), earnings management is the practice of using tricks to misrepresent or reduce transparency of the financial reports. Assessment of a firm’s financial performance will be distorted when accounting information

contained in the accounting reports is not a true reflection of the business transactions it purports to represent when firms engage in earnings management.

In order to ensure high quality accounting information that will eliminate or reduce significantly earnings management, accounting standards are introduced by regulatory bodies of accounting practices. Accounting standards are the authoritative statements of best accounting practices relating to various aspects of measurements, treatments and disclosures of accounting transactions (Shil, Das &Pramanik, 2009). Biddle and Hilary (2006) as cited in McNichols and Stubben (2008) found that better accounting information reduces information asymmetry between managers and outside suppliers of capital. Information asymmetry occurs when a party to a contract has information advantage over the other party thereby resulting in imbalance in information. Imbalance in information allows managers to manipulate accounting numbers in order to sustain or enhance the market value of the company.International Accounting Standards Board (IASB) introduced International Financial Reporting Standards (IFRS) to reduce information asymmetry on financial reports prepared in different countries.

Nigeria adopted IFRS for quoted companies in the year 2012 to replace the Nigerian Statements of Accounting Standards (SAS). Okafor and Ogiedu (2011) found evidence that IFRS have the potential for yielding greater benefits such as better information for equity holders and regulators, enhanced comparability and improved transparency of results, improve business performance management and impact on other business functions apart from financial reporting. It is in the light of the Okafor and Ogiedu (2011) findings that this study examines the impact of IFRS on earnings management in the manufacturing companies in Nigeria.

STATEMENT OF THE PROBLEM

The introduction of IFRS is to improve the quality of financial reporting by providing greater disclosure, thus, improving accountability and transparency. According to Barth, Landsman and Lang (2008) as cited in Santos and Cavalcante (2014), the concepts and the recognition, measurement and disclosure criteria established by the IFRS provide higher information quality, which in turn affects the usefulness of the accounting information generated. High quality accounting information will ensure that earnings management is eliminated or reduced significantly. Although, Onalo, Lizan and Kaseri (2015) examined the effects of changes in accounting standards on earnings management in Malaysia and Nigeria, the study, however, focused mainly on the banking industry. The banking industry is highly regulated such that the results may not be applicable to other industries that are not so regulated.

In addition, findings by previous researchers on the impact of IFRS on earnings management is contradictory, thereby making study on the subject inconclusive. While Jeno (2011) reported that earnings management reduced after the post-adoption period in Hungary, Xu (2014) found evidence that IFRS adoption did not reduce the level of earnings management but that earnings manipulation is intensified after the adoption of new accounting standards among United Kingdom private firms.

To the best of the knowledge of this researcher, it is yet to be confirmed through any empirical study that the adoption of the IFRS has eliminated or reduced significantly earnings management in the manufacturing sector of the Nigerian economy and the impacts on financial performance. This study is, therefore, an attempt to fill the existing gap by examining the impact of the IFRS on earnings management in quoted manufacturing companies in Nigeria.

OBJECTIVES OF THE STUDY

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

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

RESEARCH QUESTIONS

The following questions were raised for this study based on the operationalized variables developed in the conceptual model:

• What is the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria?
• What is the relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria before the adoption of IFRS?
• To what extent does financial performance affect earnings management in quoted manufacturing companies in Nigeria after the adoption of IFRS?

HYPOTHESES

The following null hypotheses were formulated for the study:

H01:              There is no significant difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria

H02: There is no significant relationship between earnings management and financial   performance of quoted manufacturing companies in Nigeria before the adoption   of IFRS.

H03: There is no significant relationship between earnings management and financial   performance of quoted manufacturing companies in Nigeria after the adoption   of IFRS.

SCOPE OF THE STUDY

This study examines the effect of IFRS adoption on earnings management in quoted manufacturing companies in Nigeria taking evidence from those that have operational offices in Rivers State. Published financial statements prepared under the Nigerian statements of accounting standards (SAS) and the restated financial statements using IFRS guidelines were used for the analysis. This is to allow for effective comparisons of the results from the same activities.

SIGNIFICANCE OF THE STUDY

This study will be relevant to researchers in identifying the reasons why quoted manufacturing companies in Nigeria engage in earnings management. Regulatory authorities of financial reporting and investors in Nigeria may find it useful in appreciating the extent to which IFRS has helped in eliminating earnings management practices and the justification for its adoption in terms of volume of work and associated cost of adoption in Nigeria. The study will also fill a relevant gap in the literature on earnings management.