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FIRM ATTRIBUTES AND FINANCIAL REPORTING QUALITY


Project topic for Accounting department

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Financial reports are prepared on the basis of sound accounting rules. Adequate steps should be taken to ensure compliance with the relevant rules.  The main objective of financial reporting is to provide high quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making (International Accounting Standard Board, 2008).  The company attributes is to provide high quality of financial reporting to influence capital providers and other stakeholders in making investment, credit and similar resource allocation decisions which increase overall market efficiency.

Biddle, Hillary and verd (2009) opined financial reporting quality is defined as the precision with which financial reports convey information about the firm operations, corporate scandals of the last decade and collapse of big firms in recent years raised concerns about financial reporting  quality which led to the passage of Sarbanes – Oxley Act which had a focus on the financial aspect of corporate governance.

Corporate governance practices improve the performance of company in two ways.  Firstly, it induce management to make decisions that would maximize the value of the company to shareholders that it is to protects investors. Secondly, from the shareholders viewpoint corporate governance systems give incentive to shareholders to monitor and influence management in order to protect their significant investment on the quality of financial statements.(Izedonmi, Josiah and Adediran 2010)

The focus of this project is to examine the relationship between company attributes and  financial reporting quality.  The remaining part of this paper is organized as follows: section 2 describes  statement of the problem , research questions, hypothesis and  objectives section 3 is on theoretical aspect and review of literature.  Section 4 describes the data and methodology used in this study while section 5 reports the result of the study.  Finally, section 6 contains the discussion and section 7, the conclusion and recommendations.

1.2       Statement of Research Problem

La Porter, Lopez-de-silanes, shleifer and vishny (2000) observed that controlling shareholders and managers use banks profits to benefit themselves rather than investors, where investors finance firms, there is a risk that  managers expropriate returns by stealing profit, selling the firm’s output, assets and additional securities to marked price diverting corporate opportunities from the firm installing possibly unqualified family members on managerial position or over-paying executives. Farben, (2005) found that firms cited for fraud had difficult overcoming the stigma even after improving their corporate governance practices.  This it is clear that weak corporate governance do not accomplish the desired goal of creating more transparent and reliable financial statement.

1.3       Research Question

  • What is the relationship between profitability and financial reporting quality?
  • How does the Chief Executive Officers practices affect the financial reporting quality?
  • What is the relationship between firm size and the financial reporting quality?
  • How does Audit committee affect the financial reporting quality?

1.4       Research Objectives 

This broad objective of the study is to investigate the relationship between firm attributes reporting quality. The specific objectives of study are to:

  • determine how profit has influence on the financial reporting quality
  • establish the relationship between firm age and financial reporting quality
  • establish the relationship between Firm size has  significant  effect on financial reporting quality and
  • Determinethe relation between leverage and practice on the financial reporting quality.

1.5       Research Hypotheses

The following are the non hypotheses

H01: There is no significant relationship between profitability and financial reporting quality

H02: There is no significant relationship between firm age financial reporting quality.

H03: There is no significant relationship between Firm size and financial reporting quality.

H04: There is no significant relationship between leverage and financial reporting quality.

1.6 Significance of the Study

The importance of financial reporting quality can be illustrated under the principal-agent relationship. The demand for external audits is directly related to the fact that it is the directors (the agents) who prepare the financial statements, which is primarily based on cost reasons. Therefore, this study is expected to provide useful insight into improving audit quality. This study contributes to the financial reporting quality literature as it provides additional empirical evidence on the impact of the size of audit firm (big and non-big) on the level of audit quality. The study also reflects the quality of audit services between “big and non-big” audit firms in Nigeria. This study will be useful to stakeholders in the Nigerian Stock Exchange (NSE) as it provides evidence on the relationship between audit quality and the reform instituted by them in formulating the Code of Corporate Governance for listed banks in Nigeria.

1.7 Scope of the Study

This study is premised on the appraisal of financial reporting quality in Nigeria. Therefore, data on corporate organisations in Nigeria were sought in providing answers to the problems and questions that have been raised in this research work. The study focuses banks quoted on the floor of the Nigerian Stock Exchange (NSE). The remainder of this project is organized as follows: Section II discusses the relevant literature including financial reporting quality, audit committee and corporate governance, board structure, ownership structure, and CEO duality and financial reporting quality. The methodology adopted to lend empirical weight to the findings was outlined in Section III. Section IV provides the results while Section V concludes the project.


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