The impact of accounting reform on accounting quality: Evidence from Nigeria

• Published date: 01 June 2020
• Author: Roszaini Haniffa,Zayyad Abdul‐Baki
• Date: 01 June 2020
• DOI: http://doi.org/10.1111/jifm.12112

J Int Financ Manage Account. 2020;31:169–190.

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wileyonlinelibrary.com/journal/jifm

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INTRODUCTION

The weak governance structures in many developing countries, including the African continent,

have been blamed for the various financial scandals in those countries (Zeff, 2012). Accordingly,

the Nigerian capital market crisis of 20081

occurred as a result of weak regulatory structures and

Received: 19 February 2019

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Accepted: 6 October 2019

DOI: 10.1111/jifm.12112

ORIGINAL ARTICLE

The impact of accounting reform on accounting

quality: Evidence from Nigeria

ZayyadAbdul-Baki1

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RoszainiHaniffa2

© 2019 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

1Department of Accounting, College of

Business Administration, Prince Sultan

University, Riyadh, Saudi Arabia

2Department of Accountancy, Economics

and Finance, School of Social Sciences,

Heriot-Watt University, Edinburgh, UK

Correspondence

Zayyad Abdul-Baki, Department

of Accounting, College of Business

Administration, Prince Sultan University,

Riyadh, Saudi Arabia.

Email: zabdulbaki@psu.edu.sa

Abstract

The effectiveness of International Financial Reporting

Standards (IFRS) is dependent on the strength of enforce-

ment of accounting standards in a given country. This study

explores the implications of the adoption of IFRS in Nigeria

after the enforcement of accounting standards was strength-

ened. The strengthening of accounting standards enforce-

ment, and the subsequent adoption of IFRS in Nigeria, was

recommended by the World Bank to improve the country's

regulatory outlook after a capital market crisis in 2007/2008

that was triggered by widespread accounting irregularities.

Results indicate that accounting quality declined in Nigeria

following the adoption of IFRS; while earnings management

increased, timely loss recognition and earnings persistence re-

duced. Our study contributes to the burgeoning literature on

IFRS adoption and concludes that the effect of IFRS adoption

is contextual. Therefore, accounting regulatory institutions

operating in a similar context to Nigeria should localize IFRS.

KEYWORDS

earnings management, enforcement, International Financial Reporting

Standards, Nigeria, public accountability model, timely loss recognition

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ABDUL-BAKI AnD HANIFFA

widespread accounting irregularities (World Bank, 2011). The World Bank (2004, 2011) recom-

mended the strengthening of accounting standards enforcement through the establishment of the

Financial Reporting Council of Nigeria (FRCN) and the adoption of International Financial Reporting

Standards (IFRS) to rejuvenate Nigeria's accounting regulatory architecture and encourage foreign

direct investment inflows. However, the benefits of IFRS adoption remain inconclusive (Leuz &

Wysocki, 2016) and vary across different jurisdictions (Barth & Israeli, 2013), especially in emerging

economies with weak institutional structures (Mongrut & Winkelried, 2019). Thus, we seek to estab-

lish whether the accounting reforms recommended by the World Bank for Nigeria have improved the

country's accounting quality.

Prior studies have shown that the effectiveness of IFRS in enhancing accounting quality is de-

pendent on the strength of a country's enforcement mechanisms (Cai, Rahman, & Courtenay, 2014).

However, Kim (2016) concludes that enforcement without IFRS adoption does not improve account-

ing quality. We examine both aspects of this argument in this study, by assessing the impact of the

adoption of IFRS on the accounting quality of Nigerian listed firms. Our study explores the unique

setting of Nigeria, where accounting standards enforcement was strengthened prior to IFRS adoption,

to determine the effect of the adoption of IFRS on accounting quality. This follows Brown, Preiato,

and Tarca’s (2014) argument that enforcement proxies in prior studies (the rule of law, investor protec-

tion, and stock exchange rules) are biased, and so, the strength of institutions that enforce accounting

standards should be adopted as a measurement of enforcement. Moreover, Leuz and Wysocki (2016)

posit that the effect of IFRS adoption in single-country contexts should be explored to reveal new

insights. However, Barth and Israeli (2013) argue that enforcement of IFRS cannot be separated from

its adoption. Therefore, following this viewpoint, we have not separated the enforcement of IFRS from

its adoption. Rather, we have adopted a single label—IFRS adoption—for both the adoption of IFRS

and its enforcement.

We tested the changes in earnings management practices, timely loss recognition, and earnings

persistence of Nigerian listed firms following the adoption of IFRS. We adopted the modified

Jones model and the abnormal working capital accrual model for earnings management, changes

in large losses for timely loss recognition, and the earnings persistence model formulated by Sloan

(1996) as measures of accounting quality. Our results show that earnings management increased,

and recognition of large losses and persistence of earnings reduced in the post-IFRS adoption

period.

This study contributes to the literature in the following ways. Firstly, it presents the implica-

tions of accounting reform on accounting quality in the context of a country with weak macro-level

governance structures (e.g., the rule of law, investor protection, and the level of corruption) but

improved accounting standards enforcement. Thus, our study contributes to the scarce literature

that explores the implications for accounting quality of strengthening accounting standards en-

forcement institutions.2

Secondly, this study contributes to the burgeoning literature on the im-

pact of IFRS adoption, which remains inconclusive in respect of the effect of enforcement on

accounting quality (Leuz & Wysocki, 2016). Thirdly, it contributes to the limited literature on the

implications of accounting reform3

for accounting quality in Africa (Nyamori, Abdul-Rahaman,

& Samkin, 2017).

The remainder of the paper is organized as follows. Section 2 describes the institutional setting

in Nigeria. Section 3 presents the theoretical underpinning, review of prior studies, and the devel-

opment of hypotheses. Section 4 explains the research methods and is followed by the discussion

of results in Section 5. Section 6 concludes the study and explains the limitations and avenues for

further research.