Background to the study
The review of information contained in the business's accounting reports can provide a picture of how well the firm has fared. Managers owe it to various stakeholders, particularly investors, to generate accounting reports that reflect the truthful and fair picture of business transactions for the time period indicated (Devalle et al, 2010). Financial reports, according to BPP Learning Media (2012), depict economic realities in words and statistics that must accurately represent the phenomena they purport to represent.
When firms are struggling, though, managers may be tempted to utilize accounting procedures to artificially boost the firm's apparent performance (Jones & Jones 2011). Managers take use of accounting rules' flexibility, which allows them to affect the direction of accounting reports by adopting accounting policies that benefit management. When accounting numbers are modified, this is one of the reasons why various accounting information can be obtained from the same business data (Ernst & Young, 2014).
Earnings management is the process of manipulating financial data to achieve a certain goal.
Earnings management, according to Jawad and Xia (2015), is a type of creative accounting. Earnings management entails deception in order to display financial figures in a way that benefits or protects management interests. Earnings management, according to Akhgar (2012), is the practice of adopting methods to falsify or diminish the transparency of financial reporting. When corporations engage in earnings management, the accounting information contained in accounting reports is not an accurate representation of the business operations it purports to represent, the assessment of a firm's financial performance will be affected (Cheong et al, 2010).
Accounting standards are created by regulatory organizations of accounting practices in order to assure high quality accounting information that will remove or greatly minimize earnings management. Accounting standards are authorized pronouncements of acceptable accounting practices pertaining to different areas of accounting transaction measures, treatments, and disclosures (Shil, Das &Pramanik, 2009). Better accounting information decreases knowledge asymmetry between managers and outside capital providers, according to Biddle and Hilary (2006), as quoted by McNichols and Stubben (2008). When one party to a contract has an information advantage over the other, information asymmetry emerges, resulting in an information imbalance. Managers can falsify accounting data to maintain or increase the company's market value if there is an imbalance in information. International Financial Reporting Standards (IFRS) were established by the International Accounting Standards Board (IASB) to eliminate information asymmetry in financial reports issued in various nations (Ernst & Young, 2014).
Nigeria adopted the International Financial Reporting Standards (IFRS) for listed firms in 2012, replacing the Nigerian Statements of Accounting Standards (SAS). Okafor and Ogiedu (2011) discovered evidence that IFRS have the potential to provide greater benefits, including better information for equity holders and regulators, improved comparability and transparency of results, improved business performance management, and impact on other business functions other than financial reporting (Cheong et al, 2010). This study evaluates the influence of IFRS on earnings management in Nigerian manufacturing enterprises in light of Okafor and Ogiedu's (2011) results.
1.2 STATEMENT OF THE PROBLEM
The purpose of the International Financial Reporting Standards (IFRS) is to improve the quality of financial reporting by requiring more information, hence increasing accountability and transparency (Devalle et al, 2010). The concepts and recognition, measurement, and disclosure standards defined by the IFRS, according to Barth, Landsman, and Lang (2008), as referenced in Santos and Cavalcante (2014), provide greater information quality, which influences the utility of the accounting information created. Earnings management will be abolished or greatly reduced if accounting data is of high quality. Despite the fact that Onalo, Lizan, and Kaseri (2015) investigated the implications of changes in accounting rules on profits management in Malaysia and Nigeria, the study mostly focused on the banking business. Because the banking business is so heavily regulated, the findings may not be relevant to other, less regulated industries.
Furthermore, past research findings on the influence of IFRS on earnings management are conflicting, rendering research on the issue inconclusive. While Jeno (2011) showed evidence that profits manipulation decreased after the adoption of new accounting standards in Hungary, Xu (2014) found evidence that earnings manipulation increased after the adoption of new accounting standards in the United Kingdom private sector.
To the best of this researcher's knowledge, no empirical study has yet proved that the implementation of the IFRS has removed or decreased considerably earnings management in the Nigerian manufacturing sector, as well as the resulting financial performance implications. As a result, the purpose of this study is to fill a vacuum in the literature by investigating the influence of the International Financial Reporting Standards (IFRS) on earnings management in Nigerian traded manufacturing businesses.
1.3 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:
1. determine the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria.
2. examine the relationship between earnings management and performance of quoted manufacturing companies in Nigeria before and after the adoption of IFRS.
1.4 RESEARCH QUESTIONS
The following questions were raised for this study based on the operationalized variables developed in the conceptual model:
1. What is the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria?
2. What is the relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria before the adoption of IFRS?
3. To what extent does financial performance affect earnings management in quoted manufacturing companies in Nigeria after the adoption of IFRS?
1.5 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.
1.6 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.
1.7 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.
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