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A STUDY ON THE IMPLICATIONS OF ETHICS IN FINANCIAL REPORTING ON MONEY DEPOSIT BANKS IN LAGOS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
There is broad consensus that an entity’s financial statements must adhere to a framework of established accounting principles, policies, methodologies, and systems. Accountants are expected to apply their best judgment according to generally accepted accounting standards when recording transactions and events that are not explicitly covered by official guidelines.
To create a robust and widely accepted financial reporting framework, it is essential for professional managers to adhere to strong ethical standards in accounting (Ikoh, 2019). Ethics, defined by Hornby (2020) as the moral principles guiding human conduct, play a crucial role in ensuring that accountants and auditors produce reports that are accurate, reliable, realistic, and unbiased. Recent business events, however, have raised doubts about whether ethical accounting practices consistently lead to reliable financial reporting (Salaudeen et al., 2018).
The primary goal of financial reporting is to enable users to assess an entity’s financial and service performance, financial position, and cash flows (Ezeani et al., 2022). This involves adhering to legal requirements, rules, common law, and contractual terms related to the evaluation of financial and service performance, financial status, and cash flows, as well as decisions about providing resources or engaging in business with the reporting entity.
Accounting professionals are tasked with preparing financial reports, and it is crucial that they follow ethical accounting standards to ensure that these reports are accurate, timely, thorough, relevant, and genuine. According to Ogbonna and Appah (2021), deep-rooted corrupt practices can undermine this process. Financial reporting is vital for assessing an organization’s effectiveness, profitability, sustainability, and progress, making the ethical decisions of accountants impactful both for themselves and others. As noted by Talebnia, Salehi, and Jabbarzade (2021), the integrity of financial reporting is limited by the honesty of the financial reports, economic condition, and operational functions of the entity over time. Business practices, environment, and culture can affect the value and trustworthiness of financial reporting to varying degrees (Gois, 2018).
Research by Ogbonna and Ebimobowei (2021) highlights that accountants’ adherence to ethical standards positively and significantly impacts the quality of financial reporting and organizational performance in Nigeria. Certified public accountants are trusted to provide financial reports based on rigorous ethical standards and conduct (Adeyeye, Adeyemi, and Otusanya, 2020). Thus, accounting ethics should influence the reliability of financial reports.
Financial decisions are based on the statements provided by accountants. According to Salaudeen, Ibikunle, and Chima (2018), it is crucial for accountants and auditors to deliver information that is effective, dependable, realistic, and unbiased to be taken seriously. However, recent events suggest that accounting ethics may not strongly correlate with the accuracy of financial reports (Salaudeen et al., 2018). There is concern that accountants’ ethical attitudes and the impact of their actions are increasingly overlooked in financial reporting.
For instance, Verdi (2019) describes financial reporting quality as “the accuracy with which financial reports communicate details about the company’s activities, especially its cash flows, to inform shareholders.” Financial statements should reflect the economic condition of the reporting entity. Thus, unethical accountants can compromise the quality of financial reporting, particularly in protecting shareholders, by prioritizing financial gain over integrity.
Accountants have responsibilities beyond their direct clients, including obligations to the public, government, vendors, shareholders, creditors, debenture holders, and employees (Appah, 2020). Ethical behavior is essential for upholding accounting standards. Because ethical actions involve moral considerations, both accountants and their stakeholders should be concerned with professional ethics (Klai & Omri, 2021). Strengthening professional ethics within the accounting community is likely to enhance the quality of financial reporting. Therefore, this study aims to investigate the impact of ethics on financial reporting in money deposit banks in Lagos.
1.2 Statement of Problem
Occasionally, accountants face moral quandaries (Babayanju, et al., 2017). As they go about their work, accountants face temptations to make moral judgements. Professionalism in accounting is predicated on accountants’ adherence to ethical standards and their determination to keep public and private interests separate (Babajanyu, et al, 2017).
According to Joseph and Dike (2014), accountants’ disregard for the standards set by financial report readers and their inherent scepticism is a major factor in the demise of some companies in the business world. Accountants’ financial reports have come under more scrutiny due to examples of business collapse and scandal. The failure of these business entities, according to Aguolu (2018), was caused by accountants not following the rules of conduct that were evident in the financial statements and how reliable they were to end users. Therefore, these financial statements need to be presented with the necessary care. Recent discussions have included a wide range of ethical concerns, including but not limited to: dealing with insiders, maintaining neutrality, accepting gifts, etc. According to experts, the credibility of the financial accounts is affected by all these moral concerns. Authors: Joseph and Dike (2014). An ethics committee, charged with discussing and resolving ethical concerns and maintaining the organization’s ethical standards, is a requirement of the revised and reprinted Corporate Governance Code (2011). Unfortunately, this has not worked as intended because many scandals that rocked businesses in the last century had their roots in unethical practices, such as when auditors and upper-level management put their own interests ahead of the organization’s (Gois, 2018). Because of this disconnect between theory and reality, it is essential to assess the ethical concerns of businesses and how they affect the reliability of their financial reports. Therefore, the purpose of this project is to find out if accounting ethics affects the reliability of financial reports.
All Nigerian registered organisations are required by law to have an ethical committee according to the Corporate Governance Code (2011). Addressing ethical issues and promoting ethical ideals within an institution are two of the main responsibilities of the ethical committee. According to Ezeani et al. (2022), the composition of ethical committees has not yielded good results, even if several business crises have been associated with ethical issues. Among the few instances of corporate scandals that occurred in the past hundred years, there were the following: the overstatement of financial reports by Cadbury Plc; the omission of African Petroleum’s N22 billion debt burden from those reports; and the conspiracy to commit fraud by banks with internal auditors (Enofe et al, 2019). When these crises are properly evaluated, it becomes clear that they are the outcome of a lack of adherence to ethical values.. Therefore, investigating the implications of ethics in financial reporting on money deposit banks in Lagos.
1.3 Objectives of the Study
The general objective of this work is to investigate a study on the implications of ethics in financial reporting on money deposit banks in Lagos. However, the specific objectives are stated as follows:
i. Determine whether objectivity as an accounting ethical principle influences the quality of financial reporting in money deposit banks in Lagos.
ii.Determine whether integrity as an accounting ethical principle influences the quality of financial reporting in money deposit banks in Lagos.
iii.Determine whether professional independence as an accounting ethical principle influences the quality of financial reporting in money deposit banks in Lagos.
1.4 Research Question
The study will be guided by the following questions;
Does objectivity as an accounting ethical principle influence the quality of financial reporting in money deposit banks in Lagos?
Does integrity as an accounting ethical principle influence the quality of financial reporting in money deposit banks in Lagos?
Does professional independence as an accounting ethical principle influences the quality of financial reporting in money deposit banks in Lagos?
1.5 Research Hypotheses
Ho1: Objectivity as an accounting ethical principle does not have significant influence on the quality financial reporting in money deposit banks in Lagos.
Ho2: Integrity as an accounting ethical principle does not have significant influence on the quality of financial reporting in money deposit banks in Lagos.
Ho: Professional independence does not have significant effect on the quality of financial reporting in money deposit banks in Lagos.
1.6 Significance of the Study
This study will be of immense benefits in multiple ways. First, it will educate stakeholders from different organisations about how to uphold their stipulated ethical principles to prevent business failures and corporate scandals. Second, it will encourage accountants to adhere strictly to accounting ethics codes in order to have certain aspects of reliability prepared and provided by them in the financial reporting template. Third, the research through its results will help organizations ‘ stakeholders make essential investment, finance, and dividend choices to support their organization’s general corporate performance. Fourthly, it will instill the spirit of professionalism, truthfulness, sincerity and integrity among accountants as they recognize that involvement in fraudulent practices is tarnishing their private reputation, professional reputation and hampering the authenticity of financial information that they release. Finally, this research will function as a guide for learners, researchers and scholars who may be prepared to carry out further research on the topic.
1.7 Scope Of The Study
The study covers a study on the implications of ethics in financial reporting on money deposit banks in Lagos. The scope of this study is limited to data from nine (9) money deposit banks with international authorization in Lagos State. The research work was so limited because of the limited availability of data and time. It also covers some of the publications of the Institute of Chartered Accountant of Nigeria (ICAN).
1.8 Limitation Of The Study
Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.
1.9 Definition of Terms
Ethics: This refers to a set of moral principles, especially ones relating or to or affirming a specified group, field or form of conduct.
Accounting Ethics: This is primarily a field of applied ethics and is part of business ethics and human ethics. Accounting ethics studies moral values and judgments as they apply to accountancy.
Financial Report: Financial report (or statements) is a formal record of the financial activities and position of a business, person or other entity. Relevant financial reports such as balance sheet, income and expenditure statement, statement of retained earnings and cash flow statements, must be presented in a structured manner which must be easily comprehensible to the end users.
Objectivity: Objectivity entails that financial report must be independent and supported with unbiased evidence.
Integrity: Integrity implies that financial report must be accurate, reliable and truthful.
Professional Independence: This refers to freedom of professional accountants from control or influence of another party or stakeholder. It implies that professional accountants must be given the free-hand to prepare financial reports devoid of internal and external interference.