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THE EFFECTS OF UNETHICAL ACCOUNTING PRACTICE ON FINANCIAL REPORTING QUALITY IN NIGERIA {CASE STUDY: AFRIBANK PLC CADBURY PLC}
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
As Nigeria strives to achieve its vision of becoming one of the top 20 global economies by 2020, a crucial challenge it faces is building investor confidence in the national economy through the adoption of ethical accounting and auditing standards that ensure transparent financial reporting. The collapse of some corporate giants and the widespread corruption in society underscore the urgent need to emphasize the importance of strong professional ethics within the accounting and auditing profession, both in developed and developing nations (Omoyele, 2010; Fodio, Ibikunle & Oba, 2013; Ogbonna & Ebimobowei, 2012).
Moreover, it is essential that accounting and auditing professionals responsible for preparing financial statements strictly adhere to ethical accounting and auditing standards. This adherence ensures the production of financial statements that are reliable, relevant, timely, accurate, understandable, and comprehensive, presenting a true and fair view of a firm’s financial position and performance. These financial statements form the basis upon which stakeholders can confidently make informed decisions.
Recently, there has been growing concern about ethical and integrity issues within the accounting and auditing profession, both in the public and private sectors, due to questionable practices. This period has been marked by numerous corporate failures, ethical lapses, and accounting scandals in both developed and developing economies. Damagum & Chima (2014) suggest that previous research indicates poor corporate governance as a contributing factor to these failures, highlighting the need for vigilance over corporate behavior and effective regulation of managers and professional accountants. Notable cases, such as Enron, Satyam, WorldCom, Global Crossing, Parmalat, Xerox, and TellOne, along with some Nigerian firms like Cadbury, NAMPAK, and Afribank, have drawn significant attention to the auditing profession, with one of Nigeria’s “Big Four” auditing firms being implicated.
These corporate failures have been attributed to accountants and auditors not adhering to professional ethical codes, negatively impacting financial reporting and the auditing profession. These global incidents have raised questions about the trustworthiness and integrity of the auditing and accounting fields (Bakre, 2007).
Financial reporting is a critical component of successful corporate governance. Accountants and auditors, who are the primary providers of information to capital market participants, are expected to exercise due diligence and demonstrate professional competence in the accounts they audit. Company directors rely on management to prepare financial statements that comply with statutory and ethical obligations, trusting in the auditors’ competence and credibility (Dignam & Lowry, 2006; Adeyemi & Fagbemi, 2011). Ogbonna (2010) argues that a society lacking ethical values cannot sustain its goals and objectives, nor those of its stakeholders, for long.
In today’s global marketplace, there is increased emphasis on adopting International Financial Reporting Standards (IFRS) to establish a common set of comprehensive financial statements worldwide, a movement led by the International Accounting Standards Board (IASB). In Nigeria, regulatory bodies such as the Companies and Allied Matters Act 2004 (as amended), the Financial Reporting Council (FRC), the Institute of Chartered Accountants of Nigeria (ICAN), the Association of National Accountants of Nigeria (ANAN), and other industry-specific organizations issue guidelines on ethical and professional standards for auditors and accountants. However, the effectiveness of these regulatory bodies in Nigeria in ensuring ethical standards among corporate managers and professional accountants remains questionable.
Ethics is a vital aspect of the work and profession of accountants in business enterprises. Professional ethics, in this context, can be defined as the commitment of management accountants to provide valuable service to management. This commitment means that management accountants possess the competence, integrity, confidentiality, and objectivity needed to serve management effectively (Blocher et al., 2005: 23-25). The standard of competence requires accountants to develop and maintain the skills necessary for their practice area and continuously reassess these skills as the firm grows and becomes more complex. However, it is often concluded that “greed and fear,” the two most powerful forces in modern capitalism, are major causes of unethical practices by professionals.
Moreover, the potential for unethical behavior by individuals and organizations is virtually limitless and, unfortunately, too often realized. For example, consider how greed overshadowed concerns for human welfare when the Manville Corporation suppressed evidence that asbestos inhalation was killing its employees, or when Cadbury overstated profits and understated losses to influence public perception, leading to the sacking of its managing director and finance director.
In light of these issues, this research study aims to examine and analyze the effect of unethical accounting practices on the quality of financial reporting in Nigeria.
1.2 STATEMENT OF OF PROBLEMS
Despite the high premium of trust and expectation the society places on professional accountants and auditors, and need of the general public to have confidence in the financial reports being prepared/audited by them in making an informed decision, it is imperative therefore, that the information being provided by accountants and auditors should be meaningfully efficient, reliable, and realistic and unbiased, but yet this accountants, amongst others, who are knowledgeable of the world’s financial systems are the one who are involved in the manipulation of complex transactions which make it difficult to identify and trace the origins and the ultimate destiny of the illicit funds or, when acting as auditors, are reluctant to reveal and report such activity, thereby making it difficult to uphold good professional ethical standard.
Despite the accounting standards and ethical codes guiding the accounting profession, morality and ethics has gone down the drain based on the occurrence of scandals in Enron, World Com, Nigerian Cadbury and similar scandals that have surfaced. The above antisocial and fraudulent behaviour of the elite and multinational companies cannot be easily perpetrated in any nation or economy without the advice, collaboration, or at the very least, connivance of professional accountants, who, acting in violation of their statutory duties to the public, provide their professional services to wealthy individuals, the ruling elite, private and public companies and multinational companies by assisting them to transfer the illicit wealth gained to the licit sector, thereby removing any possible criminal links associated with the wealth acquired, which indirectly negatively affect the public perception of auditor’s independence and the audit expectation gap the society have towards their professional ethical standards.
For the past two decades, a wave of high profile accounting scandals have cast the profession into the limelight, for examples,the case of Aruwa & Atabs (2011) provided instances of creative accounting and fraudulent financial reporting in Nigeria to include Alpha Merchant Bank Plc (accounting problem and market manipulation) or the Lever Brothers Plc (exaggerated profit through the use of questionable accounting methods) and AP Petroleum Plc (false financial reporting) all these act were perpetrated in collaboration with the professionals (Accountants, Auditor).
In spite of the enabling IT audit tools and the various professional standards such as standards as Nigerian Accounting Standard Board (NASB) now Financial Reporting Council (FRC), American Institute of Certified Public Accountants (AICPA), Auditing Practices Committee of the Institutes of Chartered Accountants of England and Wales (ICAEW) issued for guidance and efficient audit work, there are still reported cases of lapses and scandals, have been threatening the existence of some quoted companies and capital markets in Nigeria.
Scandals within the accountancy sector have threatened the reputation of accountants and in all this type of cases; As a result of non-extended audit tenure impair auditor’s independence and ability to employ professional skepticism on matters at their disposal, also it should be noted that Non adherence to the spirit and letter of corporate governance was also responsible for the corporate scandals,
1.3 OBJECTIVES OF THE STUDY
The Major Objectives of this study are:
Determine the effects of Unethical Accounting practices on financial reporting quality in Nigeria economy.
Explore the effects of Unethical Accounting practices on financial reporting quality in Nigeria capital Market.
Identify some common unethical practices by accountants, auditors, directors and company secretaries who are key players in the market economy.
Determine what motivates professional accountant to committing unethical accounting practices.
Examine the major causes of unethical practices by professionals, directors and market operators/participants when carrying out their financial activities.
Eliminate and suggest possible remedy for the problem of unethical accounting practices perpetrated by professional accountants.
1.4 RESEARCH QUESTION:
The following research questions were asked in the project study, providing answers to them will help achieve the aim of this research study.
These questions includes;
i. What are the effects of Unethical Accounting practices on financial reporting quality in Nigeria?
ii. Are there any effect of unethical accounting practices on financial reporting quality in Nigeria capital Market?
iii. Common unethical practices by accountants, auditors, directors and company secretaries who are key players in the market economy?
iv. What are the major causes of unethical practices by professionals, directors and market operators/participants when carrying out their various activities?
v. What are the possible remedy in reducing the effect of unethical practice by professional accountants on financial reporting in Nigeria?
1.5 SIGNIFICANCE OF STUDY
Unethical accounting practices occur when a company does not follow the rules of generally accepted accounting principles or GAAP. The rules of GAAP are established by the federal government, though Unethical accounting practices motivated by bonus incentives, pressure to obtain financing or a desire to appear successful are not always illegal, but they almost always have an adverse effect on your business.
Furthermore, this research study will attempts to identify some common unethical accounting practices on financial reporting quality by accountants, auditors, directors and company secretaries who are key players in the market economy, and also suggest possible recommendation for them.
This study will also looked into the opinions of accounting lecturers on whether the teaching of ethics among student accountants can facilitate in instilling ethical behaviour in future accountants, it will also be of great benefit to the corporate world as the effective work of accountant and auditors in an organization who in turn helps to promote good ethical accounting practice and financial reporting quality.
This study will continue to be of interest to management of companies, auditors and other users of financial statements. It will enable a better understanding of common ethical and unethical accounting practices on financial reporting standard and quality.
The study will also be of importance to government agencies, companies, regulators and policy makers who are involved in regulating the ethical practice of accounting Standards and guidelines, it will also educate people on unethical accounting practices, why they occur, and how we as a nation can promote ethical behaviour.
Finally this study will be of great significance to schools and students, it will serve as a reference point for future researchers who will want to research more on the topic.
1.6. RESEARCH METHODOLOGY
To appreciate the effect of unethical accounting practice on financial reporting in Nigeria, this study has adopted a case studies approach as a research methodology. Hence, evidence from these sources was used to compile case studies. While this evidence may be inadequate and slightly biased, it nonetheless provides evidence of antisocial unethical practices. An examination of these documentary reports is principally valuable in this esteem in that, it aids to structure and contextualize the active role of professional accountants and auditors in facilitating unethical practices in Nigeria.
1.7. SCOPE OF THE STUDY
Since the study focus on the effects of unethical accounting practices and financial reporting quality, For the purpose of carrying out a detailed analysis of the effect unethical practice by professional accountants could have on financial reporting, the research will be restricted to the two selected companies in Nigeria.
1.8. LIMITATION OF THE STUDY
The limitation of the study includes:
Financial Constraint: the success of every research work depends largely on finance availability, and this affected the researcher because there was little or average finance at his disposal to cover the research study and the ones available was not sufficient to carry out the research effectively.
- Time:- this has to do with the time-frame given for the completion of the study and also other challenges; activities and engagements forcing me as a final year student reduced my time-frame.
Inability to generate required material from the secondary sources, such as textbooks and internets.
1.9. DEFINITION OF TERMS
Ethics: These are the moral principles that an individual uses in governing his or her behaviour. Ethics refers to a discipline in which matter of right and wrong, good and evil, virtue and vice are systematically examined (Brinkmann, 2002; Ogbonna & Appah, 2012).
Accountant: this is an individual whose work involves the application of accounting in performing some or all of the following: preparing financial statements; conducting financial investigations; preparing, reporting and advising on the purchase and sale of businesses, business combinations, obtaining capital for enterprises, changes in partnerships, fraud and insolvency, preparing tax returns; giving advice on tax administration and other services.
Objectivity: refers to the need to maintain impartial judgment (e.g. not developing analysis to support a decision that the accountant knows is not correct.
Auditor: this are individual, a partnership firm, or an organization carrying out an audit of an enterprise or an undertaking. Such persons are not usually employed by the accounting entity or by its managers and is, as far as possible, independent of the persons who manage the entity, hence they are often referred to as ‘external auditors’; or ‘accountants in practice
Directors: this is defined under section 244(1), CAMA 2004 as ‘persons duly appointed by limited liability company to direct and manage the business of the company. Every registered company must have at least two directors for private limited, and at least seven for public limitedcompany
Confidentiality: A professional accountant should the information obtained in the course of professional services without explicit permission of the employer or the employer’s confidential anddisclose such information unless or without the professional legal duty exposing the information on be permitted.
Unethical accounting practices: this refers to a situation when a company does not follow the rules of generally accepted accounting principles or GAAP.
Professional ethic refers to the professional behavior and characteristics that identifies professional accountants as members of a profession.
1.10. BRIEF HISTORY OF CASE STUDY (AFRIBANKS PLC, AND CADBURY PLC.)
Afribank Nigeria PLC was a commercial banking, real estate and insurance broker based in Lagos, Nigeria.[1] It was established by French investors in 1959 under the name Banque Internationale pour l’Afrique Occidentale (BAIO] As at 2010, the bank operated over 250 branches across Nigeria, and was one of the region’s “Big Four” banks. Afribank used the Temenos Globus banking application in its branches.
Operations
Afribank’s core business was in commercial and retail investment banking. It also operated stock brokering firm, an insurance brokerage firm, a trustees and investments company, and estate development company, a capital market firm, and an offshore finance company in Dublin, Ireland.[2] Afribank also invested in companies in the financial and real sectors of the Nigerian economy.
Failure and closure
Afribank failed in 2011 and its banking license was revoked by the Central Bank of Nigeria, the national banking regulator. The assets and some of the liabilities of the now defunct Afribank Plc. were acquired by Mainstreet Bank Limited, a bridge institution, specially created for that purporse on the same day.[3] In July 2012, the Federal High Court of Nigeria, in Lagos ordered that the affairs of the defunct Afribank Nigeria Plc be wound up, since its license had been revoked
Mainstreet Bank was formed in August 2011 by taking over the assets and some of the liabilities of the now defunct Afribank Plc., whose commercial banking license was revoked. MBL was issued a commercial banking license on 5 August 2011.