Impact of State Institutions on the Quality of Accounting Practice in Nigeria

Journal of South African Business Research

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Iyoha Francis Odianonsen, Ojeka Stephen and Ajayi Anijesu

Department of Accounting, Covenant University, Ota, Ogun State, Nigeria

Volume 2014 (2014), Article ID 782177, Journal of South African Business Research, 10 pages, DOI: 10.5171/2014.782177

Received date : 21 September 2013; Accepted date : 13 January 2014; Published date : 31 December 2014

Cite this Article as: Iyoha Francis Odianonsen, Ojeka Stephen and Ajayi Anijesu (2014)," Impact of State Institutions on the Quality of Accounting Practice in Nigeria", Journal of South African Business Research, Vol. 2014 (2014), Article ID 782177, DOI: 10.5171/2014.782177

Copyright © 2014. Iyoha Francis Odianonsen, Ojeka Stephen and Ajayi Anijesu. Distributed under Creative Commons CC-BY 3.0


Although institutions play significant roles in ensuring a high quality of accounting practice, their impact is not well understood in the context of Nigeria. Drawing on the perception of users and compliers of accounting information, this study empirically investigates the impact of state institutions on the quality of accounting practice in Nigeria. The results of this study, using multiple regression analysis, indicate   the impact of state institutions  on the quality of accounting practice in Nigeria  is  fairly significant. Though joint significance was observed, however, the level of impact differs among the institutions. This implies that  regulations are not adequate in ensuring a high level  quality of accounting practice  in Nigeria. These findings provide support for the need to streamline, strengthen and harmonize existing regulatory arrangements in Nigeria with a view to codifying   as separate laws to enhance their effectiveness. Thus, inconsistencies in the provisions of the institutions and differences in the assessment of the quality of accounting practice by the relevant bodies would be minimised and monitoring and enforcement of regulations enhanced.

Keywords: Institutions, Quality of Accounting, Relevance, Reliability


The quality of accounting practice is a fundamental requirement for users who require accounting information that is useful for investment and other similar decision making tasks. This is also true at the macro level where  the government at various levels requires accounting information for the management of the economy. When the information generated  represents the “economic substance” of an organization, then accounting practice is regarded as useful in terms of relevance, reliability and comparability (Spiceland, Sepe and Tomassini (2001:36). This has not been the case in Nigeria where   the World Bank and others that have  interest in financial reporting have criticized the country for  suffering from poor institutional weaknesses in regulation, compliance and enforcement of accounting standards and rules (Okike, 2004) and thus, does not meet the required  quality.
 The criticisms became pronounced due to the series of corporate failures involving banks in Nigeria in the mid 1980s to early 1990s following the deregulation of the Nigerian economy.  These incidents  brought accounting practice into sharp focus. The incidents and criticisms have persisted even though there are quite  a number of  regulatory bodies  whose provisions directly affect the practice of accounting.  It is in recognition of these criticisms, as noted by  Iyoha  and Jimoh (2011)  that Nigeria officially adopted  the International Financial Reporting Standards (IFRS)   in  2012.

Therefore, the objective of this  study  is to contribute to the current discourse in this area by exploring  the question  of whether Nigeria has the required  and relevant state agencies to support the quality of accounting practice needed by stakeholders. Our findings should assist relevant stakeholders to understand how state agencies impact the quality of financial reporting in Nigeria.

Following the preceding discussions, the rest of this paper is structured as follows: The institutional and legal requirements for financial reporting in Nigeria are  described in section 2, while Section 3 is a review of  related literature and development of hypothesis.  The data and methodology used in this study  are described  in section 4 and   Section 5  reports the result of the study.  Finally, Section 6 contains the conclusion and recommendations.

The Context of  Financial Reporting in Nigeria

In Nigeria, there are several bodies whose regulatory activities affect accounting practice.   However, the Companies and Allied Matters Act, CAP (20), LFN (2004)  is the main legal framework  for accounting practice. It is required by virtue of the provisions of the Act that financial statements of companies in Nigeria comply with the requirements of the various agencies to guide the preparation of financial statements. This is important in order to reduce differences in accounting practice in the country. The table below shows the   enabling instruments and the relevant agencies charged with regulating accounting practice in Nigeria. 

Table 1: Enabling Instruments and Institutions

Literature Review and Development of Hypothesis

The main  objective of accounting is to provide information to interested parties to make complete, timely and reliable  economic decisions. Sometimes, the information could be asymmetric and unreliable. This situation of information asymmetry is often used to justify the need for accounting regulation by the state. Sometimes, the regulation extends well beyond the information to the preparers of such information. Consequently, accounting and accountants are now subject to a wide range of regulations exercised by state agencies and related bodies.  According to Uche (2002: 472),  the state has a significant role in  developing  accounting practice  and this is “more prominent in a developing country like Nigeria without a well-developed political culture.” He further observes that the reaction of the state to the objective of professions could depend on factors such as the “type of government in place, public expectations, and developmental requirements of the state, social relationships and the knowledge base of the profession.”

The state institutions as actors in the system interpret and define direction for other stakeholders in the accounting environment. The enactment of the NASB Act , 2003 in Nigeria, is an evidence that  state regulatory  institutions actually have such roles. According to Post and Mahon (2000:400), regulatory institutions interpret  and focus change in   two different ways. One, it serves  to stabilize the firm/body or institution against potential pressures for change from the public. Such a role provides the firm/ institutions operating in a particular industry with the opportunity to react to pressures for change. Two, the institution may be an agent of change especially where the leadership  is desirous of effecting changes in the industry practices.

The  state institutions are important in accounting practice discourse because they have been identified as key drivers of financial reporting outcomes. Studies by Fan and Wong, 2002; Leuz, Nanda and Wysocki,  2003 and Haw, Hwang and Wu, 2004, corroborate  the  assertion that institutions affect firms’ actual reporting and disclosure practices,  the accounting standards in force, notwithstanding.  That institutions can impact accounting practice can be appreciated from the perception of  North (1990), who  defines institutions as the “humanly devised constraints that shape human interaction” that provide the “rules of the game in society.” where rules govern the actions of players. He further observed that “though institutions could be inefficient  sometimes, they exist primarily to curtail the  opportunistic tendencies which could arise in an exchange relationship.”

Notwithstanding the nature and quality of institutions in existence in a given financial reporting jurisdiction,  three major criteria exist  in assessing  the quality of accounting practice (Owusu-Ansah and Yeoh 2005:33 and Afolabi, 2007:5). These criteria are relevant,  reliable and comparable of information.  Relevance (timeliness)  and Reliability are relevant  in determining the information that might be reported to ensure the depiction of an economic phenomenon is complete, neutral and free from material misstatement. It encompasses two requirements. First, financial reports ought to be prepared on the basis of sound accounting rules. Second, adequate steps should be taken to ensure the compliance with these rules (Simon and Taylor, 2002:45). Similarly, and in the opinion of FASB (2008) and  IASB (2008), Comparability is  the “quality of information that enables users to identify similarities and differences between sets of economic phenomena.”  Enhanced financial statement comparability is an outcome of compliance with regulations. Thus,  the main gain of the enhanced comparability which flows  from  mandatory regulations,  is greater cross-border investment (McCreevy 2005; Bielstein, Munter, and Schinas, 2007 and Tweedie, 2008).

Hypothesis Development

The study focused on the following institutions- The accountancy bodies in Nigeria (Institute of Chartered Accountants of Nigeria (ICAN) and the  Association of  National Accountants of Nigeria (ANAN), the Central Bank of Nigeria (CBN), Nigerian Accounting Standards Boards (NASB), National Insurance Commission (NAICOM), Security and Exchange Commission (SEC) and the Corporate Affairs Commission(CAC) in  investigating the impact of state institutions on the quality of accounting practice. The reason for the  focus on these  institutions is that  their provisions have implications for accounting and financial reporting practices of the regulated entities (World Bank, 2004).

Accountancy Bodies (ICAN and ANAN)

The Institute of Chartered Accountants of Nigeria (ICAN) and the Association of National Accountants of Nigeria (ANAN) are  the two bodies  responsible for the production of professional accountants in Nigeria. In this capacity, they  ensure that members maintain high professional conduct required by stakeholders in discharging  their professional and imperative duties. Therefore, a positive impact of the accounting bodies on the quality of accounting practice is expected.

Central Bank of Nigeria (CBN)

The banks and non-banking financial institutions are under the  regulation of the Central Bank of Nigeria as the main statutory regulator. The regulation is as of  the terms of the Banks and Other Financial Institutions Act, BOFIA (1991). The BOFIA contains provisions on financial reporting by banks.  Banks are required under the Act  to submit audited financial statements to the CBN for approval before publication. In line with these provisions, the impact of CBN on the quality of accounting practice is expected to be positive.

Corporate Affairs Commission (CAC)

Under the provisions of CAMA, the  Corporate Affairs Commission has the power  to regulate compliance with the financial reporting requirements in Nigeria. Listed companies in Nigeria,  therefore, have it as a legal requirement to file a copy of their audited financial statements and directors’ report with the Corporate Affairs Commission. Thus,  the impact of CAC on the quality of accounting practice is posited to be positive.

Securities and Exchange Commission (SEC)

Under the Investment and Securities Act of 1999 and the Securities and Exchange Rules and 
Regulations (1999/2007), the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (SE) regulate market participants. In that capacity, listed companies are required to file their  audited financial statements  with SEC and NSE before publication within three months after year-end. Listed companies are  expected to comply fully with the relevant provisions, and thus,  a positive impact of SEC on the quality of accounting practice is expected.

National Insurance Commission (NAICOM)

The audited financial statements of listed companies are expected to be submitted to the NAICOM within six months of year-end. This is because the NAICOM is charged with the administration and enforcement of the provisions of the Insurance Act under the National Insurance Act 2003. Based on its provisions with regard to accounting practice and with due compliance, a positive association of the impact of NAICOM on the quality of accounting practice is expected.

Nigerian Accounting Standards Board (NASB)/Financial Reporting Council of Nigeria

Before the Financial Reporting Council of Nigeria was established, the Nigerian Accounting Standards Board (NASB) was setting  local accounting standards under the Nigerian   Accounting Standards Board Act, 2003. Based on its mandate, it is required to influence accounting practice in Nigeria as  the Act gave it  the  legal backing to enforce compliance with relevant standards. Consequently, a positive impact of the NASB on the quality of accounting practice in Nigeria is expected.
Based on the fore-going discussions, the following hypothesis is  formulated for this study.

H1: State institutions have significant positive impact on the quality of accounting practice in Nigeria

Research Method

The survey research approach  was adopted in  the study and drew on the perception of stakeholders (compilers  and users) of accounting information  because it is the interpretation of stakeholders’ expectations by institutions that forces changes in the core areas of professional practice (Post and Mahon, 2000;  Mtigwe and  Chikweche, 2008). The data were sourced using  questionnaire administered to a total of 183 compilers (preparers) and two hundred and twenty five (225) users (represented by investment analyst).  The  copies of the questionnaire  returned by the compilers were 75 out of which 38% representing (69) were useable. For the users, 43, representing 19% of the total copies of questionnaire returned were found useable.


The constructs (state institutions)  were measured using purpose-developed multi-item indicators. To  develop the  measures/indicators, the enabling instruments of each of the institutions were first searched.  In order to determine the relevant items for inclusion in the instrument, relevant and knowledgeable managers in  the institutions  were interviewed. A five-point Likert-type scale was used to measure all variables/constructs.  We  undertook series  of steps to assess the validity of our measures in order to overcome potential measurement problems.

Particular attention was paid to the discriminate validity and reliability of each construct. In order  to assess whether  the multiple items represented a uni-dimensional scale,  each section of the measurement instruments was factor analyzed. To ascertain   the internal consistency of the indicators measuring a given construct, we also assessed the composite reliability of each of the constructs. The result of the Pearson correlation coefficients indicates that the variables correlate fairly well (between 0.436 and 0.695). This means there is no perfect correlation among the variables since no correlation coefficient is greater than 0.9. The implication is that there is no cause for concern with multicollinearity since the correlations among the exogenous variables (constructs)  are not sufficiently high (Griffiths, Hill and Judge, 1993).

The individual item reliability (factor loading) and Composite reliability measured by Cronbach Alpha range between 0.808 and 0.876. The threshold of 0.50 for individual reliability and 0.70 for composite reliability (Hulland, (1999) is not violated. Thus, there is a reasonable level of both discriminant  and composite validity in our constructs.

Model Formulation

The  model investigating the impact of state agencies  on the quality of accounting practice in Nigeria is expressed as follows:

QAP =α0 + α1ACCTB + α2NASB + α 3SEC+ α4CBN + α5NAICOM + α6CAC + u1 .…………….…1      
The variables are as defined in the table below-

Table 2:   Explanatory Variables and Predicted Signs

Equation  (1) utilized the composite index of relevance, reliability and comparability as (QAP)  using the pooled data (users’ and compilers’ responses). Equation (1) was used to test the hypotheses.  Equation 1 is further decomposed and replicated as equations 2-4 ( shown below) to capture the different elements of quality of accounting practice-Relevance (RELEV), Reliability (RELIAB) and Comparability (COMPAR) as dependent variables.

RELEV =α0 + α1ACCTB + α2NASB + α 3SEC+ α4CBN + α5NAICOM + α6CAC + u1 .…………….…2

RELIAB =α0 + α1ACCTB + α2NASB + α 3SEC+ α4CBN + α5NAICOM + α6CAC + u1.…………….…3

COMPAR =α0 + α1ACCTB + α2NASB + α 3SEC+ α4CBN + α5NAICOM + α6CAC + u1.………………4   
Results and Discussion

OLS Estimation

Table 3:  OLS  Regression Results

Note: Numbers in each cell are arranged in the following order- Coefficient, t-values (in parenthesis), p-values.
The F statistic at p< 0.001 is significant in the four equations as F = 530.260, 9.514, 6.525 and 7.08  for  equations 1, 2, 3 and 4 respectively. This shows that the regressions have good fit.

The hypothesis predicts that  there is significant positive impact of each of  (ACCT, CBN, CAC, SEC, NAICOM and NASB)  on the quality of accounting practice in Nigeria.  In equation 1, which was used to test the hypothesis,  the coefficients for ACCTB, and CBN are positive and significant, implying that both institutions contribute positively to the quality of accounting practice in Nigeria. This position is consistent with the hypothesis.  NASB and CAC,  though positive, are not significant.  Both SEC and NAICOM have negative signs. Thus, the results for  NASB, CAC, SEC and NAICOM are not consistent  with the hypothesis. This position indicates  that the provisions of NASB, CAC, SEC and NAICOM are not being enforced and  complied with in the compilation of accounting information.

In terms of the quality of relevance (RELEV) of accounting practice, only two agencies have positive implications-NASB and CBN, while for reliability (REIAB) and comparability (COMPAR) only the Accounting bodies have positive implication for accounting practice. Except in terms of reliability, SEC has negative implication for accounting practice. The results also indicate that NAICOM has also not impacted accounting practice positively in Nigeria.


This study has made contributions  to our knowledge  of the impact of state institutions on the quality of accounting practice in Nigeria. The impact of  the professional accounting bodies is positive and highly significant. This could be ascribed   to the  strategies evolved in education and training,  professional ethics and discipline of members and regular review of examination syllabus to take note of emerging issues in the profession.  For instance, the professional accounting bodies engage in  organizing Mandatory Continuing Professional Education Programmes for their members yearly. The bodies also actively participate in international seminars and trainings organized by bodies such as the International Federation of Accountants(IFAC)  and other similar regional bodies of accountancy. The positive impact which the CBN has on the quality of accounting practice in Nigeria may be ascribed  to the fact that the banking sector is highly  regulated in Nigeria in line with the elaborate provisions in both the CBN Act and the BOFIA. The CAC is rated poorly. The result suggests that there is  significant lapse  in the enforcement of compliance with relevant rules and regulations. This may have been strengthened  by the high level of corruption and poor record keeping by the Commission as earlier noted by the World Bank. The result, as it relates to SEC is consistent with the observation made by the World Bank (2004), that the SEC is  ineffective in ensuring compliance with financial reporting requirements and enforcing sanctions  against defaulters.

The impact of the NAICOM is negative though not significant. This suggests that  the  provisions of the Insurance Act are not being  enforced by the Commission. This observation is supported by the Word Bank (2004) which noted that the Insurance Act under which the NAICOM operates does not adequately provide mechanisms to enforce compliance. The impact of the Nigerian Accounting Standards Board (NASB)  is positive but not significant.  The NASB  itself operated without an enabling legal authority until the enactment of the NASB Act in 2003 although the standards issued by the NASB  have statutory backing.  Before  the Act of 2003, compliance with accounting standards was not compelled by any instrument  but based mainly on persuasion. However, after the Act was enacted, compliance  became statutory with strict penalty for  any default (see Sections 22-24, NASB, Act 2003).


The study was designed to ascertain the impact of state institutions on the quality of accounting practice  in Nigeria. Though joint significance was observed and  the level of impact differed among the institutions, the regression results support only two  of the six hypotheses. That is, only two of the institutions-Professional accounting bodies (ICAN  and ANAN) and the Central Bank of  Nigeria (CBN)  significantly and positively impact the quality of accounting practice in Nigeria. These findings provide empirical evidence that the current accounting regulations in Nigeria do not lead to significantly high transparent and better financial reporting.  There is  a need to streamline, codify and strengthen the requirements for financial reporting. This will assist to minimise inconsistencies in the provisions of the institutions with regard to financial reporting, remove the legion of bodies  that review and approve financial statements before they are published. The regulatory bodies need to be  strengthened in terms of  capacity to ensure that their statutory provisions are adequately enforced with high level of commitment.

This study is subject to a number of limitations. First, only two groups of stakeholders (users and preparers of financial statements) were considered to the exclusion of others which include for instance, auditors and  academic accountants. Second, while the study focused on only six institutions, there are other institutions whose provisions and activities could impact the quality of accounting practice in Nigeria. Following  these limitations, future research might consider more stakeholders as well as more institutions in order to have  more robust results.


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