Firms’ Profitability and Financial Reporting Quality: Pre and Post IFRS Adoption in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue I, January 2020 | ISSN 2454–6186

Firms’ Profitability and Financial Reporting Quality: Pre and Post IFRS Adoption in Nigeria

Lucky Izobo ENAKIRERHI^1*, Emmanuel A. L. IBANICHUKA² & Clifford O. OFURUM^{3
 1, 2, 3}Department of Accounting, Faculty of Management Sciences, University of Port Harcourt, Choba, Rivers State, Nigeria
*Corresponding Author

Abstract: – The study examines firms’ profitability and the quality of financial reports: pre and post IFRS adoption in Nigeria. The main objective is to examine the effect of profitability on earnings quality of firms in addition to the impact IFRS has on the profitability of firms in Nigeria. The study uses the quantitative method of analysis, the multiple regression analysis to examine what effect ROE and ROA have on earnings quality and t-test of mean difference to test for difference between the mean of pre and post IFRS adoption. To analyse earnings quality, discretionary accrual is measured using the Jones’ model. The results show that the effect of profitability on the quality of earnings after adoption of IFRS is mix depending on what measure of profitability was adopted. ROE has negative (positive) effect while ROA has positive (negative) effect on discretionary accruals (earnings quality). On the impact of IFRS adoption on profitability of firms, the results show a non-significant impact on the return on equity of firms and a statistically significant impact on the return on assets of firms. Overall, IFRS adoption has had a negative impact on the profitability of firms quoted on the floor of the Nigerian stock exchange.

Key words: Profitability, IFRS, Earnings Quality, Financial Reporting Quality, Earnings Management, Discretionary Accruals

I. INTRODUCTION

The relationship that exists between profitability and reporting quality had been a subject of controversy over the years, especially as profitability or performance of a firm over an accounting period is an important and significant firm’s data influencing the financial reporting quality of firms. Although, it is not uncommon to find studies such as Alsaeed, (2006), Haniffa & Cooke (2002), Nelson & George (2013) who found no significant effect of profitability on earnings quality, other authors such as Almed, Billings, Morton & Stanford-Harris (2002), Kamaluarifin (2016) argued that profitability influence on the quality of disclosure could be explained from two perspectives. The first is that management of more profitable firms tend to disclose more information to show forth their sustained performance in order to gain compensation arrangement and sustain their position. In other word, increase in profitability has the attendance effect of lowering earnings management and result in better quality of financial statement.

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