ACCOUNTING DISCLOSURES AND CORPORATE ATTRIBUTES IN NIGERIAN LISTED COMPANIES
CHAPTER ONE
INTRODUCTION
1.0  Background to the Study
Published annual reports are required to provide various users - shareholders, employees, suppliers, creditors, financial analysts, stockbrokers, management, and government agencies – with timely and reliable information useful for making prudent, effective and efficient decisions.  The extent and quality of disclosure within these published reports vary from company to company and also from country to country. Literature reveals that the level of reliable and adequate information by listed companies in developing countries lags behind that in developed ones and government regulatory forces are less effective in driving the enforcement of existing accounting standards (Ali, Ahmed and Henry, 2004:183). Non-disclosure results from immature development of accounting practice in developing nations (Osisioma, 2001:40). The government regulatory bodies and the accountancy profession in these nations suffer from structural weaknesses which could encourage corporate fraud at the expense of those that have economic and proprietary interest in the business environment.
The business environment has witnessed changes over the years, mainly influenced by globalization and technological innovation. In recent years, there has been substantial increase in trading activities at the Stock Exchanges worldwide and Nigeria is not left out. For example, the market capitalization at the Nigerian Stock Exchange was N763.9 billion in 2002; it grew to N2.112 trillion in 2004 and to N5.12 trillion in 2006 (NSE Factbook, 2007:37). Companies worldwide are now vying to penetrate international capital markets. The disclosure of adequate and reliable information is necessary to penetrate these international markets. Those competing for funds in the international capital arena have been found to comply with disclosing mandatory requirements and in addition disclose significantly more voluntary accounting information that enables them to compete globally (Meek, Roberts and Gray, 1995: 556).
Since the fall of Enron in the United States, a wider recognition of the importance of corporate transparency and disclosure has evolved (Akhtaruddin, 2005:400). Corporate transparency is determined by the information it discloses in its financial report. Accurate, relevant and reliable disclosures are seen as means of enhancing corporate image, reducing cost of capital, and improving marketability of shares. High-quality accounting information facilitates the acquisition of short and long term fund and also enables management to properly account for the resources put in their care. Thus, it acts as a significant spur to the growth and development of money and capital markets, which are fundamental to the smooth running of any economy. Meek et al (1995:556) submit that effective functioning of capital markets, however, significantly depends on the effective flow of information between the company and its stakeholders.
 Prior studies (Singhvi, 1968:551-552; Singhvi and Desai, 1971: 129-138; Buzby, 1975:16-37; Firth, 1979:273-280; McNally, Eng and Hasseldine, 1982:11-20; Chow and Wong Boren, 1987:533-541; Wallace, 1988:352-362;  Cooke, 1989:113-124; Cooke, 1992:229-237; Cooke, 1993:521-535; Wallace, Naser and Mora, 1994:41-53; Wallace and Naser, 1995:311-368; Inchausti, 1997:45-68; Owusu- Ansah, 1998:605-631; Entwistle, 1999:323-341; Tower, Hancock and Taplin, 1999:293-305; Depoers, 2000:245-263; Haniffa and Cooke, 2002:317-349; Ho and Wong, 2001:139-156;  Street and Gray, 2001:1-127; Bujaki and McConomy, 2002:105-139; Chau and Gray, 2002:247-265; Naser, Al-Khatib and Karbhari, 2002:41-69; Camfferman and Cooke, 2002:3-30; Ferguson, Lam and Lee, 2002:125-152; Eng and Mak, 2003:325-345; Ali et al, 2004:183-199; Prencipe,2004:319-340; Akhtaruddin, 2005:399-422; Al-Shammari, 2005:1-210; Daske and Gebhardt, 2006:461-498; Iatridis, 2008:219-241; Barako, 2007:113-128, Dahawy and Conover, 2007:1-20) as summarized in Table 2.01  (pages 58-62), show that disclosure levels are associated with some company characteristics. Similar research methods, in particular the regression models are observed to have been used by these researchers in different contexts. It is also observed that the results of the empirical studies vary from country to country. This is principally due to the unique business environment attributable to each country of study.
In the Nigerian context, comprehensive studies of Nigerian listed companies have been conducted by World Bank Group. It is observed that the Nigerian financial reporting practices are deficient (World Bank, 2004:1). Apart from the studies conducted by the World Bank, disclosure practices by Nigerian companies have been empirically investigated by Wallace (1988:352), Okike (2000:39), Adeyemi (2006:40) and Ofoegbu and Okoye (2006:45). Their observation is quite similar in that they all found the Nigerian corporate reporting practices to be weak.
The current global financial and economic crunch has resulted in increased attention to improve and enforce financial reporting disclosures worldwide in order to reform the global economy. Nigeria is recently taking steps to align all corporate reports to the International Financial Reporting Standards (IFRSs) as a means of enhancing full disclosure and strengthening stakeholder confidence. Nigerian Stock Exchange has directed all companies that are listed on the exchange to adopt the IFRSs by December 2011 while the Central Bank of Nigeria has also told Nigerian banks to adopt the IFRSs by December 2010 (Egedegbe, 2009:1).
1.1    Statement of the Problem
The mandatory and voluntary disclosure of financial information in corporate annual reports and their determinants have attracted considerable research attention in the developed countries than developing ones (Akhtaruddin, 2005:40; Barako, 2007:114). Discoveries in the developed countries most especially in the European Union (EU) have aided the government to revamp the compliance mechanisms. They have also assisted the government in issuing out directives that facilitate the harmonization process and invariably bring all community companies up to a reasonable level of disclosure.  Only a few studies (see Table 2.01, pages 58-62) have been carried out in developing countries relating to issues of disclosure and the corporate attributes influencing it.
The global economic crisis that came to light in the second half of year 2008 has led to the collapse of many financial and non-financial enterprises world wide. The current global financial recession was ignited by situations in the United States, which posed serious questions about transparency and accountability worldwide. It is widely believed that the lack of proper use of international accounting standards in affected countries (of which Nigeria is a part) hinders “transparency” in the financial statements of corporations and banks. As a result of this, financial statements fail to provide useful information, on a timely basis. The immediate past President of the United States of America, Ex-President George Bush identified the need to improve accounting rules, so that investors around the world can understand the true value of the assets they purchase (Bush, 2008:3).
It is often alleged, however, that listed companies do not fully comply with the disclosure requirements stipulated by the regulatory agencies (Akhtaruddin, 2005:401).  Emerging nations have been under pressure to improve their quality of corporate financial reporting. According to Ali et al. (2004:183), the government regulatory bodies and the accountancy profession of emerging nations suffer from structural weaknesses and often take a lenient attitude towards default of accounting regulations. Consequently private and institutional investors (local and foreign) are hesitant in investing in such emerging economies due to lack of transparency.
Re-vamping age-old company legislations and developing accounting and reporting regulations acceptable and understandable to users have become an important policy issue confronting emerging nations including Nigeria.  In a study conducted by the World Bank Group on the observance of standards and codes for Nigeria, it is observed that the Nigerian financial reporting practices are deficient (World Bank, 2004:1). The Statements of Accounting Standards (SASs) seem to be incomplete because there are many accounting issues not yet covered in these standards which had been addressed by the International Financial Reporting Standards (IFRSs). Over the years, extensive revisions have been conducted on the IFRSs which have not been reflected in the SASs; large sections and paragraphs in IFRSs which are newly included cannot be found in the SASs. According to Impey (n.d.), the SAS disclosure requirements have remained unchanged and they are partly based on old IASs that had been withdrawn by IASB. The SASs does not cover all the aspects of financial reporting and are not sufficient to form a basis for preparing a high quality financial statement, in accordance with the IFRS.
Accounting reports of Nigerian companies have been found to be deficient over time (Wallace, 1988:352; Adeyemi, 2006:193, Nzekwe, 2009:1), in the sense that they lack vital information that will enable stakeholders make informed decisions.  Apart from the studies conducted by the World Bank, disclosure practices by Nigerian companies had been empirically investigated by Wallace (1988:352), Okike (2000:39), Adeyemi (2006:1) and Ofoegbu and Okoye (2006:45). Their observation is quite similar in that they all found the Nigerian corporate reporting practices to be deficient. Two notable studies are the doctoral works of Wallace (1988:352) and Adeyemi (2006:1). Wallace (1988:352) researches on the extent of financial reporting disclosure by using a sample of 47 publicly quoted companies in Nigeria for the period 1982 to 1986.  His study won international recognition and accolade, since this was the first work to show a detailed analysis of this subject empirically for Nigeria. Nonetheless, one drawback of the study is that it does not examine the disclosure of specific items of information. It also does not empirically determine the variability of disclosure as a result of specific company attributes. Moreover, this study was conducted more than two decades ago and since then there have been additional reporting standards locally and internationally, changes in legislation, business and reporting environment and securities reporting rules. Adeyemi (2006:1) built on the works of Wallace by considering SAS 1 to SAS 21 and using a sample of 96 listed companies with year end between 2003 and 2004. In addition, he empirically determined the relationship between disclosure and some company characteristics. His study is quite noble; however, with the fast pace of changes in the global business world. We need to be conversant with latest developments in this area of research.
The lapse in the financial reporting system had led to the presentation of the Financial Reporting Council (FRC) Bill to the National Assembly in Nigeria. The Bill is still currently under debate at the National Assembly. The FRC Act when enacted would replace the NASB Act with enlarged functions (Nnadi, 2009a:14). It is expected to go a long way in strengthening the financial reporting system in Nigeria and to ensure credence of financial reports and corporate disclosure practices among Nigerian companies.
Incessant changes in the global business and reporting environment - new developments and updates on the local and international accounting standards, changes in corporate structure, and legislation- call for a constant update in the research in this area of study. Additional empirical evidence on mandatory and voluntary disclosures and the factors influencing them in Nigeria will enhance the quality of literature in this field of study. Thus, this makes a research of this nature of paramount interest.
1.2    Objectives of the Study
This thesis aims at providing empirical evidence to the disclosure practices of listed companies in Nigeria.
Specifically, the objectives of this research are to:                                                                                
empirically determine the extent of compliance of  the listed financial and non-financial Nigerian companies with the disclosure requirements of SASs;           
examine empirically the compliance of the listed financial and non-financial Nigerian companies with the disclosure requirements of IAS/IFRSs for disclosures not contained in the SASs;           
examine whether the listed financial and non-financial  companies in Nigeria are providing more information than statutorily required in their annual financial reports;   
determine the factors influencing the extent of information disclosure in the annual reports of listed companies in Nigeria; and
identify the opinion of preparers, auditors and users of accounting information on the disclosure practices of listed companies in Nigeria and on consequences of nondisclosure of relevant accounting information.
1.3   Research Questions
The research objectives are guided by the following research questions.
What is the extent of compliance of listed financial and non-financial Nigerian companies with the required disclosures of the Nigerian Accounting Standards Board (NASB)?
What is the extent of compliance of listed financial and non-financial Nigerian companies with the required disclosures of IAS/IFRSs that are not contained in the SASs?
Do Nigerian financial and non-financial listed companies disclose discretionary information more than the minimum required by accounting standards?
What are the primary factors attributable to the overall levels of disclosure?
Are there differences in the views of preparers, auditors and users of accounting information on disclosure practices of listed Nigerian companies?
What are the consequences of non-compliance with the disclosure requirements of accounting standards?
1.4   Research Hypotheses
In this study, five hypotheses are formulated to achieve the research objectives i to v respectively. The hypotheses are hereby stated in the null and alternative forms.
Hypothesis 1
Ho: There is no significant difference in the level of compliance with SASs disclosure requirements for listed financial and non-financial companies.
H1: There is a significant difference in the level of compliance with SASs disclosure requirements for listed financial and non-financial companies.
Hypothesis 2
Ho: There is no significant difference in the level of compliance with IFRS/IAS disclosures not contained in the SAS for listed financial and non-financial companies.
H1: There is a significant difference in the level of compliance with IFRS/IAS disclosures not contained in the SAS for listed financial and non-financial companies.
Hypothesis 3
Ho: The level of voluntary disclosure by listed financial companies is not significantly different from that by listed non-financial companies.
H1: The level of voluntary disclosure by listed financial companies is significantly different from that by listed non-financial companies.
Hypothesis 4
Ho: There is no significant association between company size, profitability, leverage, company age, industry type, size of audit firm and multinationality and the extent of disclosure by Nigerian listed companies.
H1: There is a significant association between company size, profitability, leverage, company age, industry type, size of audit firm and multinationality and the extent of disclosure by Nigerian listed companies.
Hypothesis 5
Ho: There are no consequences to non-compliance with the disclosure requirements of the accounting standards.
H1: There are consequences to non-compliance with the disclosure requirements of the accounting standards.
1.5   Significance of the Study
Accurate corporate reporting is a necessary tool for the short – and long term survival of any nation. It aids budgeting, planning and decision making. It had been suggested by previous researchers that institutions in developed economy cannot be transplanted in developing economies and so research on disclosure practices in a country like Nigeria will enable us to have a thorough understanding of the nature of corporate reporting in developing countries (Wallace, 1988:352). Disclosure practices by Nigerian companies were empirically investigated by Wallace (1988:352), Okike (2000:39), Adeyemi (2006:1) and Ofoegbu and Okoye (2006:45) in the past, and they all discovered that corporate reporting practices in Nigeria is deficient. However, the following have been identified as the existing gap in knowledge:
There is no comprehensive research on the compliance of listed Nigerian companies with the accounting standards (local and International) and factors influencing them.
The analysis of previous researchers deals with only the accounting standards in issue at the period of their study. Accounting standards are being issued perpetually and there is a need to keep pace with the compliance of companies with these Standards.
The rapidly changing global economic and financial environment calls for a constant update in this area of study.
This study intends to fill the currently observed gap by considering the:
latest available version of annual reports during the field work (year 2006);
requirements of local and international accounting standards operational at the time of study;
voluntary disclosures based on contemporary issues;
factors influencing the extent of information disclosure in the annual reports of listed companies in Nigeria. This is examined empirically to determine whether the corporate characteristics found relevant in previous studies are also identified in this research or not; and
views of preparers, auditors and users of accounting information on the disclosure practices of listed companies in Nigeria and on the consequences of nondisclosure of relevant accounting information.
It has been identified that several groups of people have vested interest in a business enterprise (Glautier and Underdown (1997: 11). The study is significant to government, investors, business management, regulatory bodies, educators, researchers, accountants, auditors and scholars particularly in the field of accounting. This research seeks to make theoretical and practical contributions to the field of accounting in the area of accounting disclosures. It will particularly enhance the quality of literature in the field of accounting in Nigeria. Researchers in this field would benefit from the study because it can serve as a bench mark for future research on corporate disclosure. It throws more light and adds to understanding on the corporate disclosure practices which would be of advantage to educators and students.
With the outcome of this research, the regulatory authorities, such as the Nigerian Accounting Standards Board (NASB), Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC) would be able to ascertain the extent of compliance with the mandatory national standards. This will help them to issue out necessary compliance directives and improve the compliance mechanisms to ensure a reasonable level of compliance by all companies. With the knowledge of the extent of compliance with the IASs/IFRSs, the government will enforce directives that would help in facilitating the harmonization process with the international standards.
The disclosure index generated in this study and the factors influencing disclosure are expected to assist local and foreign investors in making more informed decisions. In previous research it was discovered that the quality of corporate disclosure influenced the quality of investment decision made by investors (Singhvi and Desai, 1971: 129). Adequate corporate disclosure will raise confidence of current and potential investors in the Nigerian economy. The managers of listed companies can assess their present level of compliance using the disclosure index generated by this research. This will help them to improve on their disclosure practices. It will enable the listed companies to compete globally and facilitate free flow capital across the Nigerian borders. Accountants, the preparers of financial statements and auditors can also utilize the disclosure index developed in this study to assess the extent of compliance by companies.
1.6   Scope and Limitations of the Study
Based on the nature of this research, two approaches were adopted in executing the objectives: survey and content analysis method. The survey research entailed administering questionnaire to a random sample of auditors, accountants and accounting information users (bankers, stockbrokers, financial analysts and educators) from the six geopolitical zones in Nigeria. The primary survey was conducted during the second half of year 2008 to the first quarter of 2009. It identifies the opinion of respondents on disclosure practices of listed Nigerian companies and on consequences of non-disclosure. Due to the nature of research, the respondents are limited to preparers, auditors and knowledgeable users conversant with the disclosure requirements of the accounting standards.
The annual report (content analysis) research entails a sample of companies from the equity/ main list of the Nigerian Stock Exchange. The study covers the annual reports with period ending, January to December 2006. As at December 2006 there were a total of 288 listed securities, these comprise 186 listed equity/ main list, 16 listed equity / second-tier security list, 47 listed industrial loan preference shares and 39 listed federal and state government stocks (Securities and Exchange Commission, n.d). The companies are generated from both the financial and non-financial sectors. A researcher-developed checklist is constructed containing 165 information disclosure items (SAS 82 items; IFRS 73 items, voluntary 10 items). The annual report study is restricted to the first-tier market of the Nigerian stock exchange because it is of paramount interest to investors. The second-tier market and companies not quoted at the Nigerian stock exchange are not put into consideration due to non availability of data and time constraint. Moreover, they are outside the scope of this work.
Based on previous studies, availability of data and its relevance to the socio-economic environment of Nigeria, only seven independent variables are selected as proxies for corporate attributes. These variables are: company size, profitability, leverage, company age, industry type, size of audit firm, number of shareholders and multinational affiliation.
1.7    Summary of Research Methodology
This section briefly summarises the methodology adopted in this study. A detailed methodology is narrated in Chapter three of this thesis. Two approaches are adopted in executing the objectives: survey and content analysis method. For the survey method, questionnaire were administered to a random sample of auditors, accountants and accounting information users (bankers, stockbrokers, financial analysts and educators) from the six geopolitical zones in Nigeria.   For the content analysis, the extent of compliance by Nigerian listed companies was measured using disclosure index on ninety listed companies, selected using stratified random sampling. The disclosure index method was seen by researchers in time past (Singhvi and Desai, 1971:130) as an adequate model for financial disclosure and was used by various researchers. The disclosure index was calculated using a researcher-developed checklist containing 165 information disclosure items (SAS 82 items; IFRS 73 items, voluntary 10 items).
The main dependent variable is the overall disclosure index which comprises the SAS, IFRS, and Voluntary indexes. The overall disclosure index is further broken down into its three constituent parts, thereby giving us four dependent variables namely Overall disclosure index, SAS disclosure index, IFRS disclosure index and Voluntary disclosure index. The independent variables are size, profitability, company listing age, leverage, auditor type, industry and multinationality. Multivariate analysis is used to explore the relationship and patterns between disclosure level and corporate attributes.  The ranked and unranked Ordinary Least Square methods were employed for the regression models. Factor analysis is utilised in computing a factor score for the size variables of eight out of sixteen equations. Furthermore, an agglomerative hierarchical clustering analysis of the voluntary disclosure items is used to determine the companies’ voluntary disclosure pattern.
1.8    Sources of Data
The sources of data for the study are both primary and secondary. For the primary data, questionnaires were administered to one thousand respondents - auditors, accountants and accounting information users (bankers, stockbrokers, financial analysts and educators) - from the six geopolitical zones in Nigeria. The auditors were contacted at the ‘Big Four’ audit firms, namely, PriceWaterhouseCoopers, KPMG, Akintola Williams Deloite and Touche, and Ernst and Young; the accountants were contacted at listed Nigerian companies while the knowledgeable users are contacted at Banks, Stock broking firms, Consultancy firms, Universities, Nigerian Stock Exchange and Securities and Exchange Commission. For the secondary data, annual reports of ninety companies with year end between January 2006 and December 2006 were obtained from the Nigerian Stock Exchange (NSE) between June 2007 and March 2008. The annual report not found at the NSE was collected from the Company’s corporate department. In order to extract the information items, all areas (financial and non–financial) of the annual reports were considered viz, chairman’s statement, reports of directors, report of auditors, audit committee’s report, corporate governance report, statement of accounting policies, profit and loss account, balance sheet, statement of cash flows, note to the accounts, statement of value added, five year financial summary, graphic illustrations, financial ratios and notes.
1.9     Operational Definition of Terms
Accounting Standards are policy documents or rules that guide the preparation and presentation of financial information.
Big four audit firms refer to the four largest international audit firms in Nigeria, these are PricewaterhouseCoopers, Ernest and Young, Akintola Williams Deloitte and Touch and KPMG.
Convergence refers to the process of narrowing differences between IFRS and the accounting standards of countries that retain their own standards.
Corporate Attributes are company characteristics that can influence corporate disclosure.
Disclosure is the appearance of quantitative or qualitative economic information relating to a business enterprise in the annual reports.
GAAP is the generally accepted accounting principles.
International Accounting Standard (IAS) is a body of accounting standard issued by the International Accounting Standards Committee (IASC) now known as IASB.
International Accounting Standards Board (IASB) is the international standard setting body responsible for issuing International Financial Reporting Standards.
International Financial Reporting Standard (IFRS) is a body of accounting and financial reporting standard promulgated by the IASB; it includes standards and interpretations adopted by the IASB.
Mandatory disclosure refers to the information companies are obliged to disclose by the accounting standards setting body.
Nigerian Accounting Standards Board (NASB) is the Nigerian accounting standards setting body responsible for issuing Statement of Accounting Standards (SAS).
Statement of Accounting Standard (SAS) is the accounting standard issued by the Nigerian Accounting Standards Board.
Voluntary disclosure refers to the discretionary release of financial information over and above the mandatory disclosure.

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