IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ON EARNINGS MANAGEMENT(A CASE STUDY OF NNPC)
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IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ON EARNINGS MANAGEMENT(A CASE STUDY OF NNPC)
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial reporting plays a central role in ensuring transparency and accountability in both private and public sector organizations. Over the years, concerns have emerged regarding the reliability of financial statements, particularly in developing economies where weak regulatory frameworks make financial manipulation more likely (Akpan & Akpan, 2017). One major challenge is earnings management, a practice where managers deliberately manipulate financial figures to achieve desired targets, mislead stakeholders, or influence contractual outcomes (Healy & Wahlen, 1999).
To improve credibility and comparability of financial reporting, many countries, including Nigeria, adopted the International Financial Reporting Standards (IFRS). IFRS is a globally recognized set of accounting standards designed to enhance transparency, comparability, and accountability of financial information (IASB, 2018). Nigeria officially adopted IFRS in 2012, mandating its use for public-interest entities such as the Nigerian National Petroleum Corporation (NNPC), which was later restructured into the Nigerian National Petroleum Company Limited under the Petroleum Industry Act. As a major player in the oil and gas sector and a government-owned enterprise, NNPC has historically been criticized for opacity and weak financial reporting practices (NEITI, 2020).
The adoption of IFRS was expected to curtail manipulative accounting practices by improving disclosure requirements, strengthening internal controls, and ensuring higher reporting quality (Barth, Landsman & Lang, 2008). Several empirical studies have suggested that IFRS adoption leads to reduced earnings management because the standards impose more stringent rules that limit managerial discretion (Callao & Jarne, 2010). However, other scholars argue that the effectiveness of IFRS depends on the institutional environment, regulatory enforcement, and organizational culture (Houqe & Monem, 2016). In Nigeria’s public sector, particularly in an entity like NNPC, institutional weaknesses may still provide opportunities for earnings manipulation despite IFRS adoption (Ofoegbu & Okoye, 2016).
Given NNPC’s centrality to Nigeria’s economic stability and revenue generation, understanding whether IFRS adoption has reduced earnings management practices within the corporation is critical. This study therefore focuses on assessing the impact of IFRS on earnings management in NNPC.
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1.2 Statement of the Problem
Earnings management is a significant challenge in financial reporting, especially in state-owned enterprises where governance structures may be weak. Prior to IFRS adoption, NNPC was widely criticized for lack of transparency, inconsistent financial disclosures, and prolonged delays in publishing audited accounts (NEITI, 2019). Several audit reports documented issues such as revenue under-reporting, overstated costs, and questionable accounting adjustments (PwC, 2015). These challenges fueled concerns about the credibility of NNPC’s financial statements.
While the introduction of IFRS was expected to improve reporting quality, reduce opportunities for earnings manipulation, and enhance accountability, evidence regarding its effectiveness in the Nigerian context remains mixed. Some studies show that IFRS reduces earnings management in private-sector firms (Odia & Ogiedu, 2013), while others indicate minimal improvement in public-sector institutions due to poor enforcement (Tanko, 2012).
It is therefore unclear whether the adoption of IFRS has actually reduced earnings management in NNPC. Given the persistent concerns about transparency and the corporation’s critical role in Nigeria’s economy, a systematic study is needed to investigate the extent to which IFRS adoption has influenced NNPC’s financial reporting practices.
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1.3 Objectives of the Study
The main objective of this study is to examine the impact of International Financial Reporting Standards (IFRS) on earnings management in NNPC.
The specific objectives are to:
1. Determine the extent of earnings management practices in NNPC before and after IFRS adoption.
2. Examine whether IFRS adoption has improved the quality of financial reporting in NNPC.
3. Evaluate the relationship between IFRS compliance and the reduction of managerial discretion in financial reporting.
4. Identify challenges affecting effective implementation of IFRS in NNPC.
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1.4 Research Questions
1. To what extent did earnings management occur in NNPC before and after the adoption of IFRS?
2. Has IFRS adoption improved the quality of financial reporting in NNPC?
3. What is the relationship between IFRS compliance and managerial discretion in financial reporting?
4. What challenges affect the effective implementation of IFRS in NNPC?
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1.5 Research Hypotheses
The study will test the following hypotheses:
H1: IFRS adoption has no significant impact on earnings management in NNPC.
H2: IFRS adoption does not significantly improve the quality of financial reporting in NNPC.
H3: There is no significant relationship between IFRS compliance and reduction of managerial discretion in NNPC.
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1.6 Significance of the Study
This study is significant in several ways:
• To policymakers: It provides insights into whether IFRS adoption has strengthened financial transparency in key state-owned entities.
• To NNPC management: Findings will help identify weaknesses in reporting practices and areas requiring improvement.
• To regulators (FRCN, NEITI, CBN): The study will provide empirical evidence on the effectiveness of IFRS enforcement in the public sector.
• To researchers and academics: It expands literature on earnings management and IFRS implementation in developing economies.
1.7 Scope of the Study
The study focuses on the Nigerian National Petroleum Corporation (NNPC) and examines financial statements covering the period before and after IFRS adoption in Nigeria. The scope is limited to the effect of IFRS on earnings management, financial reporting quality, and challenges affecting IFRS implementation within NNPC.
1.8 Limitations of the Study
The study may encounter limitations such as inadequate access to NNPC’s detailed financial data due to confidentiality issues, possible respondent reluctance, and limited availability of long-term audited IFRS-compliant reports. Nonetheless, the researcher will rely on credible secondary sources and available reports to mitigate these challenges.
1.9 Definition of Key Terms
• International Financial Reporting Standards (IFRS): A set of global accounting standards issued by the IASB to improve financial reporting transparency and comparability.
• Earnings Management: The deliberate manipulation of financial statements to achieve desired outcomes (Healy & Wahlen, 1999).
• Financial Reporting Quality: The degree to which financial statements reflect a true and fair view of an entity’s performance (Barth et al., 2008).
• Managerial Discretion: The level of flexibility managers have in selecting accounting methods and estimates.
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