Structure Of Nigerian Financial System Accounting Essay

Structure Of Nigerian monetary System Accounting EssayThe need for transp arncy and clarity in the presentation of pecuniary conveyments has been an endemic phenomenon which has contri stilled to the laid-back level of corruption in Nigeria. This level of inadequacy in appropriate disclosure of relevant information is peculiar to most evolution economies. Ali et al., (2009) buttressed the hitch that the level of disclosure of adequate and reliable information by companies in emerging nations lags undersurface developed western capital markets and regulatory bodies be slight coreive in enforcing the accounting regulations. They added that overseas investors argon often hesitant to invest in companies operating in emerging economies due to the drop of transp arncy and lack of sufferance of world-widely recognised standards. Chamisa (2000) pointed out that the internationalist accounting harmonization objective is rattling for ontogenesis countries because of their portentous dependence on inflows of hostile capital to finance economic and industrial developments. This argument is clearly relevant to the Nigerian economy, which is dependent on the international institutions like World Bank and external Monetary Fund for funding.In a developing economy, such as Nigeria, pecuniary welkin development has been accompanied by structural and institutional changes. fiscal sectors generally prepare long been recognised to play a crucial role in economic development of an economy (Ogujuiba and E.Obiechina, 2010).This sector is often seen as the backbone of the body politics economy due to its impact. The pecuniary system in Nigeria became liberalized when structural adjustment programme was introduced in the 1980s. In recent years the system had undergone significant changes in terms of the policy environment, look of the institutions, ownership bodily structure, depth and breadth of markets, as well as in the regulatory framework. However, in spite of the far-off reaching reforms of the past two decades, the Nigerian financial system is non yet in a position to fulfil its potential as a propeller of economic growth and development (Onoja et al.,2012).In Nigeria, most companies including financial institutions return been complying with standards issued by The Nigerian Accounting Standard Board (NASB) for a number of years. These standards represent Nigerian Generally Accepted Accounting Practice (PWC, 2011). The information disclosed in Audited Financial Statements (AFS) is guided primarily by the Companies and Allied Matters take on (CAMA) 1990. Section 334 (2) of the Act provides details of information to disclose. In addition to this provision, banks and other financial institutions including Primary Mortgage Institutions (PMI) are judge to comply with Banks and Other Financial Acts (BOFIA), and Nigeria Deposit Insurance Corporation (NDIC) Act 2006 (Abiola and Ojo, 2012).However, in recent years it has been quit e roughhewn for emerging economies to adopt, either wholly or partly modify form, world(prenominal) Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB), with a view to break corporate describe standards and pass on international investments for the development of their economies otherwise struggling due to lack of resources (Ali et al, 2009). To this end, all financial institutions in Nigeria grant been mandated by the regulatory bodies from January 1, 2012 to adopt IFRS as a means of improving financial insurance coverage standards and encourage international investors to invest in the country.1.2 Research AimThe overall aim of this research is to assess the prospects and the challenges of bankers acceptance of IFRS by financial institutions in Nigeria. It considers what impacts the toleration of IFRS could take in curbing the level of corruption and ensuring that high level of transparency is brinytained in the majo r(ip) sector of the economy.1.3 Research ObjectivesSpecifically, within the context of this dissertation, the objectives of this research are to1) To examine if lack of transparency, mainly the inadequate disclosure of relevant information in the financial statements and incomparability with global accounting standards were the factors that necessitated the toleration of IFRS by Nigerian Financial institutions.2) To assess if the approachs of the bankers acceptance of IFRS outweigh its benefits. Consequently to enable the researcher to evaluate the prospects and challenges the bankers acceptance of IFRS is having on the financial sector.3) To evaluate the impacts the adoption of IFRS go awaying have on relevant areas of the financial reports ranging from the preparation and presentation of the financial statements, information technology and scrutinize report.4) To explore the potential benefits local and distant investors go forth derive from the IFRS adoption.The review o f the current writings on IFRS adoption has focused mainly on the developing economies, considering the impacts its adoption will have on those emerging markets. For suit, Bremer and Elias (2007) highlighted that companies from developing economies with weak financial transparency and corporate governance will find it difficult to prepare capital and attract overseas investors. Similarly, D.Singh and Newberry (2008) focus on good corporate governance as one of the requirements for complying with International financial reporting standards by developing economies.The uniqueness of this dissertation is that it is specifically concentrating on the financial institutions in a developing economy, where the application of these international financial reporting standards is paramount. The role of financial institutions in developing economies cannot be overlooked, as stated by Bakker and Gross (2004,p.3) because they advance savings mobilisation by offering both individuals and instit utional savers and investors additional instruments and pass on for placement of their funds. In addition, they provide credibility for developing economies in International market. Hence, the researcher would be delving into the prospects and challenges the adoption of international financial reporting standards will have on these financial institutions in the context of Nigerian economy.1.4 Statement of Research Problem and QuestionsThe intention of this research is to gain an insight on the rationale behind the adoption of IFRS by financial institutions in Nigeria, the prospects and challenges of the transition from Nigerian GAAP to IFRS and the impacts of its adoption.In Nigerias economic history, the strides of the last few years, which have been internationally acclaimed, was exceptional. The many reforms that have engendered the current success have largely included those in the financial sector, particularly, the positive policy shifts in the domestic bullion market as a f irst step towards a more robust and enduring facilities for the sector (Iganiga, 2010). President of Institute of Chartered Accountant of Nigeria (ICAN), Mrs Elizabeth Adegite has stressed the need for transparency in the nations financial institutions, saying this would wage war against future failure in the sector (Ekeleme, 2009). The adoption of IFRS by this sector should address the issue of this lack of transparency.In order to attain the objectives of this research, the questions that this finding seeks to answer are1) What are the driving factors and likely constraints the adoption of IFRS will impose on the financial Institutions in Nigeria?2) What impacts would IFRS adoption have on the financial statements and other essential areas of the financial system?1.5 Value of this ResearchThis research adds value to current research specifically in the area of Impacts of IFRS adoption, in the context of Nigerian financial institutions, where the implementation of IFRS just took o ff beginning of this year 2012. This report will serve as a benchmark for future researchers or any knowledge seeker on the relevance of IFRS in an emerging economy like Nigeria, taking into cognisance the discordant schools of thought examined in this field. It will overly enlighten the Nigerian public and as well boost the confidence of potential investors (be it orthogonal or local) on how the adoption of IFRS will provide credibility to the financial reporting made by the financial institutions.1.5.1 Structure of Nigerian Financial systemIt is important to beget a brief description of the structure of Nigerian Financial system in this early part of the research so as to have a glimpse of what it entails. Afangideh and Olofin (n.d.) stated that the Nigerian financial system can be broadly divide into two sub-sectors namely the informal and the formal sectors. The informal sector comprises the local money lenders, the thrifts, saving associations, etc. This component is poorl y developed, limited in reach, and not integrated into the formal financial system. Its exact size and effect on the entire economy remain unknown. The formal financial system on the other hand can be further subdivided into capital and money market institutions. This is shown in the diagram beneathFigure Structure of Nigerian Financial SystemSource CBN 2010 Report1.6 Structure of the DissertationThis dissertation is divided into five chapters.The first chapter is the introduction which includes background of the schooling, research aim and objectives, statement of research problem and question, structure of Nigerian financial system, value of the research and structure of the dissertation.Chapter two focuses mainly on literature review which comprises the globalisation of IFRS and definition of break terms, conceptual framework and models, the drive for IFRS by Nigerian financial institutions, precedent research and evolution of Nigerian accounting system.Chapter three deals w ith research methodology which encompasses research method, research strategy, research approach, limitation of the research and method of entropy collection.Chapter quaternion considers the case analysis and interpretation of findings. This consists of compatibility of Nigerian GAAP and IFRS, accounting differences between Nigerian GAAP and IFRS, converting to IFRS effects on Nigerian Banking.Finally, Chapter Five is the conclusion and recommendation.This chapter deals with analysing the data and interpretation of the findings. This analysis involves data collected from both primary and secondary sources relating to financial institutions in Nigeria. This research utilizes hybrid method comprising both qualitative and vicenary methods. However, the qualitative method is the key method while quantitative method is used to back some of the findings of the qualitative method. It is expedient to first consider the compatibility of the Nigerian GAAP and the International financial Re porting Standards before assessing the prospects and challenges the adoption of the foreign standards on the financial institutions.4.2 Compatibility of Nigerian GAAP and IFRSBefore any logical country would consider adopting a foreign accounting standard, the first thing will be to look at the similarities and differences. If there are no differences, then adoption would be of no immense value. With the advent of globalisation, the worlds capital markets have witnessed rapid expansion, diversification and integration. These changes have brought a shift away from local financial reporting standards to global standards (Terzungwe, 2012). It is important to state here that no research work or even publication can do justice to the many differences in the details that exist between IFRS and Nigerian GAAP. According to Price Waterhouse Coopers Report (2011), the major similarities and differences between the IFRS and Nigerian GAAP are shown in the table on a lower floorinstitutionsThe p rospects of adopting IFRS by Nigeria represented an ample shift in financial reporting for the countrys financial institutions because many requirements in IFRS differ from those in the Nigerian GAAP. The adoption of these foreign standards has a lot of promising prospects for the Nigerian financial institutions as they aim towards establishing their presence in the global markets. The various prospects that necessitated the adoption will be analysed below taking into cognisance the responses from the interviewees coupled with some relevant articles in order to enhance credibility.4.3.1 Transparency and CredibilityOne of the most salient points put ahead by the interviewees as a main prospect of adopting IFRS by Nigerian financial institutions is that it will enhance transparency and credibility. Thirty percent of those interviewed mentioned that lack of transparency and credibility in the area of financial reporting by financial institutions in the country has contributed to the slow progress of the economy. Some of them clearly stated that this lack of transparency is as a result of poor integrity of the management staff. They further explained that the lack of transparency is in the area of provision of inadequate reports, create financial statements on a highly selective basis and non-disclosure of important information that could influence the users of financial statements. This response is corroborated by Dr Ngama (2012), the former minister of state for finance in Nigeria, who highlighted that the failure of banks and other financial institutions is the lack of transparency, mainly in form of manipulation of figures and intact disclosure. According to Omotoye (2011) transparency and credibility are seen as important ingredients in nation building and formation of national character help scholars better understand the dynamics of corruption and hold the key to successful resolution of corruption problems. With the adoption of IFRS, Coker (2012) state d that Nigerian financial institutions can be seen to hold their own in the international market and at the same time compete favourably. He added the financial sector must be seen to comply with the new transparency standards under IFRS in order to achieve their objectives.However, two of the respondents are of different perspectives that they do not think the adoption of IFRS will create any more transparency than the local accounting standards. They believed that transparency is not a function of the accounting standards but the preparers of the financial statements.4.3.2 Boost Reputation in the foreign marketAnother prospect highlighted by the interviewees is the boosting of the write up of Nigerian financial institutions in the foreign market. A statement from one of the interviewees read Nigeria and everything Nigerian including financial institutions have lost their reputation in the international market just because of our bad leadership and insincerity in terms of prepara tion and presentation of financial statements. He further stated that no Nigerian company wants to be associated with by foreign investors simply because of fraudulent act linked with Nigerians who are top officials in the so called reputable companies in the country. lx percent of the interviewees strongly agree that boosting of reputation of financial institutions in the international market is the main prospect of the adoption of IFRS in Nigeria. They believe that if financial statements are prepared under a global accounting standard, there will be less manipulation of figures which will inadvertently promote good take in of the Nigerian companies in the foreign market. To support this statement, Ramanna and Sletten (2009) argued that countries choose to adopt IFRS when they expect to increase the share of foreign capital and tack in their economy expected foreign involvement in an economy can make current adoption of international standards more attractive. They added that fi nancial institutions with low levels of foreign capital and trade can choose to adopt IFRS if they are expecting growth in those factors.4.3.3 To encourage foreign investorsThis is another vital prospect the respondents consider cannot be overlooked. In their opinion, they mentioned that the main rationale behind adopting IFRS is to encourage foreign investors. This prospect share the same percentage with the prospect mentioned above in the data collected. Sixty percent of the respondents are of the opinion that with the adoption of IFRS by financial institutions, foreign investors will be encouraged to invest in the companies because reports are clearly written in complaisance with the foreign standards that they understand. Some of the respondents acknowledged that foreign investors confidence will be boosted because financial statements of potential companies can be compared with other similar companies in the foreign market. To substantiate this statement, Ali et al.(2009) wrot e that overseas investors are often hesitant to invest in companies operating in emerging economies due to the lack of transparency and lack of acceptance of internationally recognised reporting standards. Ogunwale (2011) buttressed the point that the adoption of IFRS by companies operating in both private and public sectors would boost the investment clime in Nigeria. Foreign investors want financial statements that are comparable with those of similar businesses in other parts of the world, for strategic decision making in semblance to mergers and acquisitions. Many foreign investors will require their subsidiaries in Nigeria to report in accordance with IFRS so that the parent company can comply with its reporting requirements in its home territory. Similarly, the implication of the new reporting format is that banks and other institutions are at the end of the financial year expected to embark on full disclosure of their activities to the extent that it should be understandabl e to both the shareholders and investors, while at the same in compliance with international best practice (BusinessDay, 2012). This means that financial statements prepared under international financial reporting standards will be more reliable than Nigerian GAAP.4.3.4 To reduce level of corruptionAnother vital point raised by the interviewees is that with the adoption of IFRS the level of corruption among top management officials in financial institution will be reduced. Five percent of the people interviewed clearly pointed out that corruption may not be totally eradicated from the financial system but to a reasonable extent will be reduced. During the interview, reference was made to the sacking of corrupt bank chief executives by the Central Bank of Nigeria governor. In their opinion, the interviewees believed that if there had been a more laconic and transparent accounting standards than the local standards, the fraudulent activities perpetrated by the banks top officers woul d not have been possible. One interviewee explained that in a view to fight corruption in the country, especially among top officers in notable companies, is one of the rationales that made the Federal Government of Nigeria to mandate companies to adopt IFRS. He further stated the more pie-eyed provisions in IFRS can address creative accounting that Nigerian GAAP is susceptible to. Onwubuariri (2012) stated that fighting corruption is not easy and since IFRS will ensure an accounting system that will checkmate corruption and fraud, there is expectation that not all stakeholders will be satisfied with its adoption. It is observed during the data track of instruction of this research that there are some IFRS frameworks which Nigerian GAAP has no guidelines. For instance, the Price Water House Report (2011) reveals that no guidance exists for non-current assets held for sale or disposal group, financial liabilities classification, convertible instruments and other vital accounting t ransactions under the Nigerian GAAP compare to IFRS. These are areas susceptible to corrupt practices.4.3.5 To facilitate cross(a) border exchange listingKip (2007) defines cross border listing as the listing of securities issued by a foreign issuer on a domestic securities exchange. He added that the reasons for this cross border exchange is for companies to boost their status as a truly global player, increase trading volume and improve shareholder relations. Five percent of the correspondents admitted that adoption of IFRS would enhance cross border exchange listing which may not be possible with Nigerian GAAP. They added that with IFRS in place, the obstacles like differences in accounting standards, inadequate financial information to cross border exchange listing will be removed because of the uniformity in the accounting standards. In a similar research conducted in India, with a parallel growing economy like Nigeria, it was observed that IFRS will eliminate blockades to cro ss border listing and would be beneficial for the investors who generally attributed to risk premium if the underline financial information is not prepared in accordance with international standards (Ray, 2012).The overall prospects of IFRS adoption by financial institutions responses from the research questionnaire distributed are shown in the table below coupled with a pie chartTable Percentage diffusion of responses of respondents on the prospects of IFRS adoption by Nigerian financial institutionsRanking according to % of respondents123451Transparency and credibility30%2 To boost their reputation in the foreign marketAnd also encourage foreign investors60%3 To enhance international comparison60%4 To reduce level of corruption5%5To facilitate cross border exchange listing5%Figure Prospects for the adoption of IFRS by Nigerian financial institutions4.4 Challenges of IFRS adoption by Nigerian financial institutionsThe adoption of IFRS presents many challenges especially for many developing nations. Ehijeagbon (2010) wrote that the convergence to a single set of globally pass judgment high quality standards is vital to economic growth and ultimately in the best interest of the public, it is essential for all the stakeholders to consider the need for their operation in overcoming the attendant challenges that come with the adoption and implementation of international financial reporting standards. These challenges are analysed below4.4.1 Cost factorThe first challenge put onwards by the interviewee is the comprise of implementation factor. Fifty percent of the responses from the questionnaire mentioned that there are various costs associated with the implementation of the foreign standards ranging from cost of training and cost of regenerate Nigerian GAAP packages with IFRS packages. In their opinion, they believe the cost of hiring IFRS trainer, creating a conducive environment for the implementation and changing the local statement of accounting standa rds packages to IFRS packages will have a big impact on the earnings of the financial institutions. In support of this view, Terzungwe (2012) highlighted that converging to IFRS has a huge cost outlay which include the cost of training personnel to understand the new global standards, cost of acquiring new accounting packages that are needed for the implementation, cost of discarding former accounting packages that are not compatible with IFRS. Madawaki (2012) added that professionals (accountants, financial analysts, auditors, tax practioners, regulators, stockbrokers and accounting lecturers) are all looked upon to ensure successful implementation of IFRS which may prove costly to small-size financial institutions. He further stated that training materials on IFRS are not readily available at affordable costs in Nigeria to train such a large group which poses a great challenge to these financial institutions in adopting IFRS.However, cardinal five percent of the respondents are o f different opinion that cost cannot be a challenging factor to financial institutions taking into cognisance their financial strength. They asserted that majority of the countrys financial institutions have the financial capability to overcome the cost factor which is evidenced in their published financial statements although their reported profits may be slightly affected in the short term but will be recupperated in the long term. An argument in favour of these respondents opinion was pointed out by Chadha (2010) that financial institutions with the intention to go global will consider cost as a benefit instead of a challenge because all their business units/investments will be on a common accounting platform.4.4.2 Lack of personnelThirty percent of the responses from the questionnaire showed that financial institutions in Nigeria do not have the right personnel to implement the IFRS. They are of the opinion that most of these financial institutions staffs are neither accountants nor auditors, thereby making it difficult to quickly adapt to the new accounting system. They added that some of the accountants in the financial organisations are not IFRS compliant because they are locally qualified. Oduware (2012) emphasised that the average accountant in most entities in Nigeria lacks understanding of advanced financial management techniques for instance financial instruments valuation, impairment analysis forecasting etc. This has slowed down the reporting process. These financial instruments are essential transactions of most financial institutions globally. In the course of this research, it is observed that lack of right and adequate personnel is major predicament for most emerging economies. The Minister of Finance in Nigeria, Mrs Ngozi O. Iweala (2011) acknowledged the fact that contempt some training programme on the set of International standards organised by some financial firms in this category, they have not really gotten to the introduce of embedd ing IFRS into their systems and process, even as some insisted that most of the companies in the country have no idea of how to go about the IFRS. Also, Adam (2009) cited a recent study conducted by the United Nations Conference on Trade and Development (UNTAD) indicates that there is serious shortage of personnel in developing countries that have the basic skills and love to implement IFRS. This therefore makes it crucial for the issue of skill gap to be tackled at the very outset in our IFRS transition.In contrast to the above view, twenty five percent responses indicated that Nigerian financial institutions have the people it takes to implement the international accounting standards. In a similar manner, some responses from the interview conducted also supported this notion that there are qualified staffs in financial organisations that possess the necessary skills to implement the IFRS, although they may need to update knowledge.4.4.3 Lack of al-QaidaThis is another challenge preventing the smooth flow of the implementation of IFRS by financial institutions in Nigeria as mentioned by some of the interviewees. Ten percent of the responses received agree that most Nigerian companies lack the proper infrastructure to effectively carry out the execution of the foreign standards. Mwaura and Nyaboga (2009) wrote that more than a half of all African countries do not have the operational accounting organisations to ease the execution of the IFRS. They added that International Financial of Accountants (IFAC) faces the daunting task of assisting these developing countries to first develop functional professional accounting organisations. Similarly, O.Ailemen and Akande (2012) argued that some of the obstacles to full implementation of IFRS are the absence of training facilities and academic curriculum in school. They also pointed out that poor reporting systems are also indication of poor infrastructure.On the contrary, forty five responses disagreed with the abo ve mentioned point. They strongly believed that Nigerian financial institutions have the technical know-how to Implement IFRS. They added that without proper infrastructure in place, they would not have been mandated to adopt IFRS in the first place. In their view, it is upheld that most Nigerian accounting standards are a replica of International financial reporting standards, except for few standards that are amended to suit the countrys environment. This argument is supported by Iyoha and Jafaru (2011) which declared that there are strong institutional infrastructure to make the transition to IFRS effective and rewarding like accountancy bodies (ICAN and ANAN), Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC), Nigerian Accounting Standards Board (NASB).4.4.4 policy-making and cultural factorPolitics and culture is also one of the challenging factors for adoption of IFRS by financial institutions in Nigeria, as most companies are being regulated by politi cal relational bodies. Government, in both developed and undeveloped countries play important part when it comes to making decisions that affect the vital part of the countrys economy. The adoption of IFRS is of great significance to Nigeria which makes the role of the government inevitable. Ten percent responses confirmed that political and cultural factor is another unavoidable challenge in the Nigerian sector. The political factor is seen to be a challenge as explained by one interviewee due to lack of continuity when there is change of political power, which mightinessiness have a negative effect on the activities of the financial sector. He stated that a new government might take over and not be in support of the IFRS due to the poor structure of the political setting With regards to culture, Jones et al., (2009) stated that integrating world-wide cultural differences to ensure that IFRS are applied and understand consistently is sure to be a difficult task. The management c ulture in most financial institutions in terms of compensation plan would have to be changed due to the differences in terms and conditions of Nigerian GAAP and IFRS (Ailemen and Akande, 2012). This tends to be a great challenge as most of the top officers feared that the terms and conditions of IFRS might be less favourable.However, five percent of the responses were of different opinion that the politics and culture may pose no challenge as the Nigerian government is more than prepared to ensure the smooth transition from the local GAAP to IFRS. To corroborate this opinion, Omankhanlen (2010) reported that the Federal Government of Nigeria is in support of the adoption of the foreign standards because it will facilitate rapid economic development as explained by the countrys Minister of Commerce and Industry in a summit organised by NASB. In addition, the Financial Reporting Council of Nigeria, a federal government agency, has concluded the arrangements for the establishment of IF RS academy as a platform the development of contemporary skills sets in all aspects of accounting and financial reporting amongst preparers, users, regulators and auditors of financial report, and the teaching and learning of IFRS in Nigeria and Africa (Financial Reporting Council of Nigeria , 2012).The overall responses on the challenges of IFRS adoption by Nigerian financial institutions are depicted in the table and graph belowTable Percentage distribution of responses on the challenges of IFRS adoption by Nigerian financial institutions1234Ranking according to % of respondentsAgreeDisagreeAgreeDisagreeAgreeDisagreeAgreeDisagree1. Cost50%25%2. Lack of personnel30%25%3. Lack of infrastructure10%45%4. P