ABSTRACT
The study is about the impact of financial reporting on financial performance of quoted
companies in Nigeria. The essence of this research work is to determine the relationship between
the quality of financial reporting and profit after tax, return on asset, and return on equity. Data
collections were both form primary and secondary sources. The primary data was basically
obtained by administration of questionnaire while that of secondary data was from annual
reports of sampled/ selected quoted companies. The study adopted the survey research and cross
sectional research design. The sampledcompanies were obtained by using the stratified sampling
technique while the sample size was obtained using the proportional sampling technique, Also,
450 copies of a well-structured questionnaire were also distributed but only 350 were returned
and analyzed. The variables considered in the study were financial reporting and financial
performance, which were represented by quality of financial reporting, return on equity, return
on asset and profit after tax. Two analytical methods were adopted for statistical analysis of the
variables. Theyare descriptive and inferential statistics. Under descriptive statistics, variables
were subjected to frequency and percentages. Data analyses werecarried out using SPSS version
20 and Eviews 7 statistical software, and the level of significance used to test the hypothesis was
5%. The findings show that there is a significant relationship between quality of financial
reporting and profit after tax. It also establishes that quality of financial report has significant
effect on return on asset. Based on these findings the study recommends that management of
quoted organizations should ensure that they adopt best practices in financial reporting because
there is direct relationship between quality of financial reporting and profit after tax, Also,
quality of financial reporting has positive impact on return on asset of the quoted companies in
Nigeria.
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TABLE OF CONTENTS
IMPACT OF FINANCIAL REPORTING ON FINANCIAL PERFORMANCE OF
QUOTED COMPANIES IN NIGERIA……………………………………………………i
ABSTRACT………………………………………………………………………………..ii
ACKNOWLEDGMENT…………………………………………………………………..iii
DEDICATION……………………………………………………………………………..iv
CERTIFICATION………………………………………………………………………….v
TABLE OF CONTENTS…………………………………………………………………..vi
CHAPTER ONE……………………………………………………………………………1
INTRODUCTION………………………………………………………………………… 1
1.1 Background to the Study……………………………………………………1
1.2 Statement of the Problem………………………………………………… 3
1.3 Research Questions…………………………………………………………4
1.4 Objectives of the Study…………………………………………………… 5
1.5 Research Hypotheses……………………………………………………… 5
1.6 Significance of the Study………………………………………………… 6
1.7 Scope of the Study………………………………………………………… 6
1.8 Operational Definition of Terms……………………………………………7
CHAPTER TWO………………………………………………………………………… 9
LITERATURE REVIEW………………………………………………………………… 9
2.1 Conceptual Review…………………………………………………………9
2.1.1 Concept of Financial Reporting…………………………………………… 9
2.1.2 Concept of Reliability of Financial Reporting……………………………….10
2.1.3 Concept of profitability…………………………………………………….12
2.1.4 Controversial Issues in Financial Accounting Reporting…………………..14
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2.1.5 Financial Reporting Legal Framework…………………………………… 16
2.1.6 Measurement of Financial Reporting Quality Using Qualitative
Characteristics………………………………………………………………18
2.1.7 Measurement of Financial Performance………………….………….……..22
2.1.8 Goals and Objectives of Financial Reporting………………………………23
2.1.9 Importance of Financial Reporting…………………………………………24
2.1.10 The Nature and Scope of Financial Reporting………………………………25
2.2 THEORETICAL FRAMEWORK………………………………………… 28
2.2.1 Stewardship Theory………………………………………………………… 28
2.2.2 Stakeholders Theory………………………………………………………….29
2.2.3 Asymmetric Theory……….……………………………………………………30
2.2.4 Voluntary Disclosure Theory…………………………………………………30
2.2.5 Ethical Relativism Theory…………………………………………………..31
2.2.6 Resource Dependence Theory ………………………………………………32
2.3 Empirical Framework……………………………………………………… 33
2.3.1 Corporate Financial Disclosure in Nigeria………………………………… 33
2.3.2 Relationship of Financial Statement with Investment
Decision…………………………………………………… ………………35
2.3.3 Deliberate Disclosure and Investors Decision Making……………………..38
2.3.4 Quality in Financial Reporting………………………………………………40
2.3.5 Organizations Attributes and Reliability of Financial Reporting……………41
CHAPTER THREE…………………………………………………………………………44
METHODOLOGY…………………………………………………………………………44
3.1. Area of the Study…………………………………………………………………… 44
3.2. Research Design…………………………………………………………………… 44
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3.3. Population of the Study…………………………………………………………… 45
3.4 Sample size and Sampling Technique……………………………………………… 45
3.5. Study Variables……………………………………………………………………. 48
3.6 Method of Data Collection……………………………………………………………48
3.7 Method of Data Analysis………………………………………………………….. 50
3.8 Model Specification……………………………………………………………….. 50
CHAPTER FOUR………………………………………………………………………… 52
DATA PRESENTATION, ANALYSIS AND INTERPRETATION…………………… 52
4.1 Data Presentation for Questions related with the Variable in the Hypotheses……..52
4.2 Frequency Table – Section A……………………………………………………… 53
4.3 Frequency Table – Section B……………………………………………………… 56
4.4 Frequency Table – Section C……………………………………………………… 58
4.5 Frequency Table – Section D……………………………………………………… 60
4.6 Frequency Table – Section E……………………………………………………… 62
4.7 Hypotheses Testing and Interpretation…………………………………………….. 64
Discussion of Findings…………………………………………………………………….. 74
CHAPTER FIVE…………………………………………………………………………. 76
SUMMARY, CONCLUSION AND RECOMMENDATION…………………………. 76
5.1 Summary………………………………………………………………………….. 76
5.2 Conclusion………………………………………………………………………… 77
5.3 Recommendations………………………………………………………………… 78
5.4 Contribution to Knowledge………………………………………………………. 78
5.5 Suggestion to further Studies……………………………………………………… 79
APPENDIX………………………………………………………………………………. 80
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Appendix A – Ordinary Least Square Analysis using Panel Data for
Hypothesis One…………………………………………………………………………………………….80
Appendix B –Ordinary Least Square Analysis usingPanel Data for
Hypothesis Two…………………………………………………….………..…….81
Appendix C–Ordinary Least Square Analysis using Panel Datafor
Hypothesis Three…………………………………………………………………..83
Appendix D – Schedule of Selected Companies …………………………………..85
Appendix E – Questionnaire ………………………………………………………..86
Appendix F – Extract of Data Presentation for Secondary
Data used For Analysis……………………………………………………………..91
Appendix G – Complete Data used in Hypothesis………………………………….95
REFERENCES…………………………………………………………………………….104
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial reporting is the communication of financial informationto various users of accounting
information tomake an investment decision, obtaining credit facilities, and other financingdeci
sions(Wild, Shaw, &Chiappetta, 2009). Furthermore, most financial reportsin Nigeria are
governed byregulations and standards from various recognised financial regulatory bodies such
as the Securities TransactionCommission (SEC), the Financial AccountingReporting Council of
Nigeria (FRCN), Nigeria stock transactionto mention a few. Financialreports are formal
andcomprehensivestatements describingfinancialactivities of a business organisation such as
themanufacturing firm. It is also a statement that reports allrelevant financialinformation, prese
nted in astructured manner and in a form easy to understandfor managerial use and for taking a
prompt and informeddecision relating to investment (IASB, 2007).
The major relevance of the financial report to some users of financial statement is to provide
information about the performance and changes in financial position of a firm.These users
include managers, directors, employees, prospectiveinvestors, financial institutions, government
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regulatory agencies, media, vendors and the general public. Financialreports are often prepared
according to national standards, corporate governance, professional ethics, and code of ethics to
avoid financial reporting fraud and scandals that might hinder effective decision-making process
by management and other users of reports. The financial reports comprises of balance sheet (now
called statement of changes in financial position), profit and loss statement (now called statement
of comprehensiveincome), statement of equity changes (Statement of changes in equity, the
company’s equity), and cash flow statements (now referred to as statement of cash flow
activities).
On the other hand, Finance is always being disregarded in financial decision-making since it
involves investmentand financing in a short-term period. Furthermore, it also acts as a restrain in
financial performance since it does not contribute to return on equity (Rafuse, 1996). A welldesigned and implementedfinancial management is expected to contribute positively to the
creation of a firm’s value(Padachi, 2006). The dilemma in financial management is to achieve
the desired trade-offbetween liquidity, solvency and profitability (Lazaridis, 2006).The subject of
corporate financialperformance has received significant attention from scholars in the various
areas of business andstrategic management.
It has also been the primary concern of business practitioners in all typesof organisations since
financial performance has implications to organisation’s health andultimately its long-term
survival. High performance reflects management effectiveness, andefficiency in making use of
company’s resources and this, in turn, contributes to the country’seconomy at large (Naser and
Mokhtar, 2004). There have been various measures of financial performance. For example
return on sales revealshow much a company earns in relation to its sales, return on assets
determines an organisation’sefficiency in the ability to make use of its assets and return on
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equity reveal the return investorsexpect to earn on their investments. The advantages of financial
measures are the simplicity ofcalculation and also that their definitions are agreed worldwide.
Traditionally, the success of acompany has been evaluated by the use of financial measures
(Tangen, 2003).
1.2 Statement of the Problem
Since the dramatic collapse of the Enron Corporation, an American company, in 2001, and the
subsequent dissolution of Arthur Andersen, which was then one of the ‘’Big five’’, audit and
accountancy firms around the world have been seen as laughable organization, because of their
inconsistency in reporting and poorly structured accounting standard. In fact, according to
Bratton (2002) Enron failure was seen as the biggest audit failure of all time. WorldCom another
American company in telecommunication industry with over US$107 billion in assets, also
suddenly collapsed just after one year (ie 2002) of the Enron misfortune. This financial scandals
and the financial crunch facing the economy of most nations have resulted in increased attention
to improve and enforce quality financial reporting practices worldwide in order to reform the
global economy, which has made stock market regulatory body such as the Nigerian Stock
Exchange (NSE) to direct all companies that are quoted on the exchange to ensure they adopt the
IFRSs (International Financial Reporting Standard) by December 2011 while the Central Bank of
Nigeria (CBN)has also directed Nigerian banks to adopt the IFRS by December 2010 (Egedegbe,
2009). But, despite all this financial regulation most quoted organization still evade this
regulation through fraudulent mechanisms which involves them ensuring that the audited
financials records sent to the central bank of Nigeria (CBN) are usually profit-oriented since it is
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the audited account that would be published and this often shows bogus profit in order to make
them attractive to the capital market after a compromised approval have been obtained from the
CBN. However, for the same accounting period, the audited account that would be forwarded to
the Nigeria Deposit Insurance Corporation (NDIC) would have a depleted deposit base for the
bank to pay an inconsequential 1% insurance premium to NDIC. For the same accounting year
too, the audited accounts that is sent to the Federal Inland Revenue Services (IFRS) would have
a reduced profit so that these banks would not pay any corporate tax to the coffers of the Federal
Government of Nigeria while at the same time concealing withholding tax and value added tax
(VAT) deductions thereby defrauding the federal government of Nigeria of revenue due to her
for economic development (Adeside,2008). This problem of this study is to examine why quoted
organisations in Nigeria still involve themselves in sharp practices despite the sections and
guidance put in place by various regulatory bodies in Nigeria. Existing studies on financial
reporting(e.g. Ferdy, Geert, & Suzanne,2009; Mohammadi, 2014; Hassan,2013) only consider
financial reporting, investment, and qualitative characteristic, none of these studies have
considered how financial performance and quality financial reporting can affect the lack of
compliance of quoted companies with guidance and sanctions put in place by financial
regulatory bodies globally and locally.
1.3 Research Questions
– Is there any significant relationship between profit after tax and quality of financial
reporting of quoted companies in Nigeria?
– To what extent does the quality of financial reporting have effect on the return on asset of
quoted companies in Nigeria?
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– To what extent does financial reporting have any impact on return on equity of the quoted
companies in Nigeria?
1.4 Objectives of the Study
The main objective of this study is to examine the impact of financial reporting on financial
performance of quoted companies in Nigeria, while the specific objectives are to;
– determine the relationship between the quality of financial reporting and profit after tax
of the quoted companies in Nigeria.
– ascertainthe effectof quality of financial reporting onreturn on asset of quoted companies
in Nigeria.
– evaluatethe Impact of quality of financial reporting on return on equity of quoted
companies in Nigeria.
1.5 Research Hypotheses
In order to achieve the objectives of this study the following null hypothesis wereformulated;
1 There is no significant relationship between the quality of financial reporting and profit
after tax of the quoted companies in Nigeria.
2 Quality of financial reporting has no effect on return on asset of quoted companies in
Nigeria.
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3 Quality of financial reporting has no impact on return on equity of quoted companies in
Nigeria.
1.6 Significance of the Study
The study is significantbecause it will provide more information to users of financial information that will enable themto developconfidence in financial reports. It is also important because
it will giveinsight into some of the statutory provisions put in place by relevant statutory organ
isations to strengthen the quality of financial reporting in quoted companies in Nigeria. The stu
dy will also providerelevant information to investors that will guide them in making an appro
priateinvestment decision. It is also important because it will serve as a resource materialand an
addition to existing literature or knowledge. The study is also important because it will provide
management with information that will help them to reduce poor financial reporting
1.7 Scope of the Study
The study was limited to thirty (30)quoted companies which cut across the eleven sectors(11)
listed on the Nigeria Stock exchange. The study covers a period of 5years, which is 2012-
2016.This period was chosen because it is the period Nigeria Started adopting the international
financial reporting standard (IFRS). The companies considered are; Ellah Lakes Plc., Chellarams
Plc., Arbico Plc., UACN Property Development CO. Ltd., Champion Brew. Plc, Guinness
NigPlc, McnicholsPlc, Nestle Nigeria Plc.Access Bank Plc.Aso Savingsand LoansPlc, Custodian
and AlliedPlc, FBNHoldings Plc, N.E.M Insuranceco (NIG) Plc.PrestigeAssurance co. Plc.Skye
BankPlc,Sterling Bank Plc.Unity BankPlc, Zenith International BankPlc, GlaxoSmithKline
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Consumer Nig. Plc.Pharma-dekoPlc,E-tranzact International Plc, AustinLaz& CompanyPlc,
CapPlc, Lafarge Africa Plc.Aluminium Extrusion Ind. Plc. Mobil OilNig Plc.Total Nigeria
Plc.Capital HotelPlc, Juli Plc, R. T. Briscoe Plc, The Initiate Plc.
1.8 Operational Definition of Terms
i. Management: This refers to the top official in the organisation, they are often
responsible for ensuring quality financial statement in quoted organisations.
ii. Organisation: Thisrefers to a group of people who come together to make profit, they
usually have a singular objective and purpose.
iii. Investors: These are individuals who make their daily leaving by investing in the stock
market.
iv. Financial Scandal: These are fraudulent occurrences in the financial world, caused by
lapses in the management and other regulatory agencies in charge of quoted
organisations.
v. Statutory Regulation: These are specific rule and regulation put in place by relevant
regulatory bodies to ensure stability in the operation of quoted companies
vi. Investor’s Psyche: This refers to the perception of investors as regards investing in the
stock market.
vii. FinancialPerformance: This refers to the process of carrying out an assignment in an
organisation in an efficient and effective manner
viii. Return on Asset: this is the ratio of profit after tax to the total asset of the selected
quoted companies considered in this research work.
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ix. Return on Equity: This is the ratio of profit after tax to the Equity of the selected quoted
companies considered in this research work
x. Quality of Financialreporting: This refers to major criteria of the financial reporting
that emphasises that information contained in the financial report should be reliable and
credible.
xi. Profit After tax: This is the profit after subtraction of tax for the period under
consideration.
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