The Effect of Accounting Ethics on the Quality of Financial Reports of Nigerian Firms (A Case Study of Brewery Industry in Nigeria)
The study examines the relationship between accounting ethics and the quality of financial reports in the Nigerian brewery industry. The study explicitly assesses the impact of accounting ethical principles of disclosure, objectivity, and integrity on the quality of financial reports of selected firms in the Nigerian brewery industry. Primary data was used in the study. The data were obtained from structured questionnaires administered to 120 accounting practitioners in six selected brewery firms in Nigeria. Analysis of data was done using descriptive statistics and linear regression analysis. The results showed that accounting ethical principles of disclosure (β=0.887; R2=0.936; p<0.05); objectivity (β=0.896; R2= 0.952; p<0.05) integrity (β=0.768; R2=0.917; p<0.05); professional independence β=0.730; R2=0.895; p<0.05) and competence (β=0.868; R2=0.934; p<0.05) significantly influence the quality of financial reports of selected organizations. The study suggests amongst others that, accountants should adhere to ethical principles while carrying out their responsibilities to generate quality, authentic, reliable, and dependable financial reports.
1.1 Background of the Study
The definition of ‘ethics’ has been given by different scholars in literature. Fisher and Lovell (2003) view ethics as the branch of philosophy that concentrates on formal academic reasoning about what is right and what is wrong. Hornby (2010) defines ethics as those moral principles that govern the behaviors of humans. The similarity in both definitions is the yardstick of measuring morally acceptable behavior. Babayanju, et al, (2017) differentiated between value and ethics, while the formal are beliefs about what is right and wrong that guide the daily activities of humanity, the latter provides tenets and standards, which are obtained from the theories of ethics, for thinking about the issue. The concept of ethics is interdisciplinary. Virtually every profession has some ethical principles governing its operations. In the accounting world, there are accounting ethics; in the business environment, there are business ethics, in the medical line, there are medical ethics, in engineering, there are engineering ethics, in the legal world, there are legal ethics and the like. The usefulness of ethics in each of these professions is to create a template for acceptable professional behavior that will guide members in the aspect of performing and discharging their duties to their clients in particular and the public in general.
As a result of lack of authenticity in the financial information prepared by accountants exerted pressure on the Congress of United States to promulgate the Sarbanes-Oxley (SOX) Act in 2002 (Enofe, et al, 2015). These acts encapsulated the establishment of the Public Accounting Oversight Board, to ensure that accountants are well-grounded in ethics education for them to be able to make reasoned ethical decisions when faced with unpleasant choices. The pervasiveness of corruption in the private and public sector coupled with a high rate of fraudulent practices have propelled accounting practitioners to comply thoroughly with codes of professional conduct. To buttress this, Ogbonna and Appah (2011) maintained that corrupt activities in the business world have gained roots, it is therefore imperative for accountants, who are saddled with the responsibility of preparing financial reports, to comply totally with codes of ethical accounting standards to produce accurate, timely, effective, comprehensive, relevant and authentic financial reports.
Financial reporting is the fulcrum of the art of decision-making. Various stakeholders of an organization need a financial report to assess the performance, profitability, viability, and progress of such an organization. The financial reports prepared by the accountants are expected to meet the criteria of a good financial report, to ensure that ‘all and sundry’ comprehend the report content (Gois, 2014). To this end, an accountant is liable to the outcomes of his moral choices both for his one life and the lives of other individuals. Catacutan (2006) posits that an accountant who is involved in fraudulent activities destroys his moral being, reputation and endangers the interests of other stakeholders dependent on him.
The essence of preparing and publishing financial reports is to provide stakeholders (such as shareholders, debenture-holders, board, staff, investors, the capital provides, and the general public) with the necessary information for assessing the performance of an organization. Providing quality financial reports is desirable because it allows stakeholders to make an investment, finance, dividends, and resource allocation decisions that will enhance the corporate performance of a firm. The quality of financial reporting shows the extent to which the financial reports of a firm are presented with every iota of honesty.
The obligations of an accountant go beyond his immediate clients but also to shareholders, debenture-holders, creditors, employees, suppliers, government, the accounting profession, and the public at large (Appah, 2010; Abiola, 2012). There is a need for accountants to behave ethically based on the stipulated codes of accounting conduct. Professional ethics is pertinent to accountants and those who rely on the information provided by the accountants because ethical behaviors involve taking the moral point of view (Klai & Omri, 2011; Enofe, et al, 2015). The development and enforcement of professional ethics in the accounting world will most likely result in enhancing the quality of financial reporting.
1.2 Statement of Problem
Accountants from time to time are confronted with ethical dilemmas. Accountants in the course of their operations, encounter situations where they are enticed to choose between right and wrong. The accountants’ claim to professionalism is premised on their compliance with ethical principles and the will that they would not allow their responsibilities to public interests to mix with personal interests (Babajanyu, et al, 2017).
Every profession has its stipulated ethical standards governing members’ behaviors. The reason for this, as espoused by Ogbonna and Appah (2011), is the incessant occurrences of corporate scandals in the Nigerian business environment. Lack of ethical considerations can deter an organization to achieve its goals and objectives. Joseph and Dike (2014) corroborate that failures of some organizations in the corporate scene are traceable to the inability of accountants of such organizations to comply with codes of conduct premised in the content of financial reports and their skepticism by end-users. The cases of business failures and scandals have led to greater scrutiny of financial reports provided by accountants.
The code of corporate governance (2011) mandated that every registered organization in Nigeria must have an ethical committee. The ethical committee is faced with the task of deliberating on ethical matters and also promoting ethical principles in an organization. The composition of ethical committees has not produced desirable results as some of the corporate scandals committed over time are linked to ethical matters (Ezeani, et al, 2012; Festus & Temitope, 2016). Few cases of corporate scandals that have occurred in the past decade include Enron Plc manipulation of its financial statements because of lack of autonomy from senior executives; Cadbury Plc overstatement of its audited financial reports; African petroleum excluded its debt burden of N22 billion in its financial reports and banks conspiracy with external auditors to commit fraud (Enofe, et al, 2015). A proper assessment of the aforementioned scandals reveals that their occurrences are outcomes of non-compliance to ethical tenets. It is, therefore, necessary to evaluate ethical issues in the accounting profession and how they affect the quality of financial reports.
1.3 Objectives of the Study
The main objective of the study is to critically examine the effect of accounting ethics on the quality of financial reports of Nigerian organizations using a case study of selected brewery companies. The specific objectives are:
To examine the effect of disclosure on the quality of financial reports of brewery companies in Nigeria.
To examine the effect of objectivity on the quality of financial reports of brewery companies in Nigeria.
To examine the effect of integrity on the quality of financial reports of brewery companies in Nigeria.
To evaluate the effect of professional independence on the quality of financial reports of brewery companies in Nigeria.
To assess the effect of competence on the quality of financial reports of brewery companies in Nigeria.
1.4 Research Questions
The questions of interest as relating to the objectives of the study are:
What is the effect of disclosure on the quality of financial reports of brewery companies in Nigeria?
What is the effect of objectivity on the quality of financial reports of brewery companies in Nigeria?
What is the effect of integrity on the quality of financial reports of brewery companies in Nigeria?
What is the effect of professional independence on the quality of financial reports of brewery companies in Nigeria?
What is the effect of competence on the quality of financial reports of brewery companies in Nigeria?
1.5 Research Hypotheses
The operational hypotheses guiding the study are stated as follows:
H01: Disclosure as an accounting ethical principle does not have a significant impact on the quality of financial reports of brewery companies in Nigeria.
H02: Objectivity as an accounting ethical principle does not have a significant impact on the quality of financial reports of brewery companies in Nigeria.
H03: Integrity as an accounting ethical principle does not have a significant impact on the quality of financial reports of brewery companies in Nigeria.
H04: Professional independence does not have a significant impact on the quality of financial reports of brewery companies in Nigeria.
H05: Competence does not have a significant impact on the quality of financial reports of brewery companies in Nigeria.
1.6 Significance of the Study
Scholars such as Ezeani, et al, (2012); Joseph & Dike (2014); Ogbonna and Appah (2011); Babayanju, et al, (2017); Enofe, et al, (2015); Nwagboso (2008) and Festus& Temitope (2016) have conducted studies targeted to assess the impact of accounting ethics on the quality of financial reports of Nigerian firms. Virtually all of these studies focused on the financial sector, thereby excluding the manufacturing sector, of which the brewery industry is a sub-sector.
This study will be of immense benefit in multiple ways. Firstly, it will inform stakeholders of various organizations on how to uphold their stipulated ethical principles to avoid cases of business failures and corporate scandals. Secondly, it will propel accountants to adhere strictly to codes of accounting ethics to have some elements of reliability in the financial reports prepared and provided by them. Thirdly, the study via its findings will assist stakeholders of organizations to make a vital investment, finance, and dividend decisions to promote the overall corporate performance of their organization. Fourthly, it will instill the spirit of professionalism, truthfulness, honesty, and integrity amongst accountants as they will realize that involvement in fraudulent practices tarnishes their reputation, professional reputation and as well hamper the genuineness of financial information released by them. Lastly, this study will act as a guide for students, researchers, and academics that might be willing to undertake further studies on the subject matter.
1.7 Scope of the Study
This study examines the effect of accounting ethics on the quality of financial reports of Nigerian firms with a strong emphasis on the brewery industry in Nigeria.
1.8 Definitions of Key Terms
This refers to a set of moral principles, especially ones relating to or affirming a specified group, field, or form of conduct.
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.
A 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 sheets, income and expenditure statements, statements of retained earnings, and cash flow statements, must be presented in a structured manner that must be easily comprehensible to the end-users.
Objectivity entails that financial reports must be independent and supported with unbiased evidence.
Disclosure refers to the additional information attached to an organization’s financial report, usually as an explanation for activities that have significantly influenced such an organization’s financial results.
Integrity implies that a financial report must be accurate, reliable, and truthful.
This refers to the freedom of professional accountants from the 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
This refers to the quality of being adequately qualified to handle assigned tasks and responsibilities.
This refers to the conglomeration of firms that produces and sells beer.
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