EFFECT OF UNETHICAL ACCOUNTING PRACTICES ON FINANCIAL REPORTING QUALITY OF MANUFACTURING FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Over the past decade, there has been a significant global concern regarding the persistent use of unethical accounting techniques and non-compliance. Inez (2021) defines unethical accounting activities as behaviors that contravene established accounting norms and ethical guidelines, frequently resulting in the manipulation of financial accounts. Unethical practices in accounting commonly involve activities such as falsifying records, manipulating earnings, providing fraudulent reports, and misappropriating assets (Anthony, 2019). Over the past several years, there has been a noticeable increase in moral misconduct and financial fraud within corporations, which has drawn significant attention to the topic (Garcia, 2020). The worldwide crises in the accounting industry have hindered the trust of individuals who rely on accounting data. The downfall of the so-called "too-big-to-fail" firms, exemplified by the collapse of prominent companies like Enron and WorldCom in the USA in 2001, Parmalat, Lehman Brothers, One Tel's in Australia, Barclay Bank in the UK, Polly Peck, Tyco, Cadbury, and MTN in Nigeria, has sparked controversy regarding the trustworthiness of the profession. This has also cast doubt on the credibility of their external auditors (Cortese, 2019).

The significant and shameful corporate failures and prominent instances of fraud in the past twenty years have raised doubts about the honesty and trustworthiness of the accounting profession, both domestically and internationally. As a result, there has been a growing need for ethical standards to be upheld within the auditing profession (Monem, 2018). Subsequently, scholars have extensively investigated the primary cause of these large corporations' failures and have ascribed it to a deficiency in ethical standards. (Aifuwa, Embele, & Saidu, 2018). The failings of these corporate entities have been linked to accountants and auditors not adhering to professional ethical guidelines, as previously mentioned. This has had a negative and increasing impact on financial reporting and the auditing profession. The global events that are currently taking place have raised concerns over the reliability and integrity of the auditing and accounting profession (Adeyemi & Fagbemi, 2019). Ogbonna (2020) argued that a society without ethical considerations may not last for an extended period in order to accomplish its intended aims and objectives, as well as those of its stakeholders.

The accounting and auditing professionals in charge of preparing financial statements must strictly comply with ethical accounting and auditing standards. This ensures the production of reliable, relevant, timely, accurate, understandable, and comprehensive financial statements that provide a true and fair representation of the firm's financial position and performance (Ogbonna & Ebimobowei, 2022).  The reason for this is because these financial accounts and reports serve as the foundation on which stakeholders can have trust in making an educated decision. Consistent with this claim, Nzotta (2018) noted that financial accounts serve as the foundation for making economic decisions. Therefore, professional accountants must continue their activities to ensure that investors and other stakeholders are provided with financial statements that accurately represent the financial position of a company and enable informed investment decisions. This is crucial because shareholders rely on these reports to make investment choices.

According to Chima (2021), corporate regulators in various nations, including Nigeria, commonly utilise specifically tailored rules to facilitate the regulation and management of firms and their behaviours, with the aim of achieving effective corporate governance.  Regulatory bodies have been established worldwide to monitor the practice and conduct of the auditing and accounting profession. The International Federation of Accountants (IFAC) has consistently developed auditing rules to improve the dependability and honesty of company financial reporting (Damagum, 2018). With the world now functioning as a global market, there is a growing focus on implementing the International Financial Reporting Standards (IFRS). This is aimed at establishing a universal set of detailed financial statements worldwide, and is overseen by The International Accounting Standards Board (IASB). In Nigeria, various organisations such as the Companies and Allied Matters Act 2004 (as amended), Financial Reporting Council (FRC), Institute of Chartered Accountants of Nigeria (ICAN), Association of National Accountants of Nigeria (ANAN), and other industry-specific bodies provide guidelines for auditors and accountants regarding ethical and professional standards (Akinbode, 2023).

The integrity of financial reporting is vital for the transparency, responsibility, and overall well-being of any economy. Financial reports play a crucial role in the manufacturing sector of Nigeria, providing stakeholders such as investors, regulators, and management with the necessary information to make well-informed decisions (Damagum, 2018). Nevertheless, the credibility of these reports might be significantly undermined by unscrupulous accounting methods (Chinedu, 2020). The manufacturing sector in Nigeria plays a crucial role in the country's economy, making substantial contributions to employment, GDP, and exports (Moses & Emeka, 2023). Nevertheless, the industry encounters other obstacles, such as inadequate infrastructure, regulatory obstacles, and financial misallocation. Unethical accounting procedures present a significant risk to the dependability and trustworthiness of financial information. High-quality financial reporting is distinguished by its precision, dependability, openness, and adherence to pertinent accounting rules and regulations. The purpose of this is to verify that the financial statements accurately reflect the financial performance and condition of a company (Bidemi et al., 2023). Unethical methods in financial reporting can have severe repercussions, such as undermining investor confidence, attracting regulatory sanctions, causing operational inefficiencies, and inflicting reputational damage (Eteka, 2022). This study aims to evaluate the impact of unethical accounting practices on the quality of financial reporting in manufacturing enterprises in Nigeria.

1.2 Statement of the problem

It is no doubt that the effectiveness of markets and the overall economy heavily relies on the utmost importance of financial reporting quality. The manufacturing industry in Nigeria plays a vital role in economic development, making a substantial contribution to GDP, employment, and industrial expansion. Nevertheless, unethical accounting techniques often compromise the credibility of financial reporting in this area. These activities not only misrepresent the accurate financial status and performance of manufacturing enterprises but also have extensive adverse consequences for several stakeholders (Emmanuel et al., 2019). 

Bolaji (2020) asserts that the primary unethical accounting practice in Nigeria is the manipulation of financial statements. It refers to the intentional manipulation of numbers in financial reports in order to portray a more advantageous financial situation than the true truth. This unethical behaviour encompasses a range of approaches, including the inflation of revenues, deflation of expenses, misleading disclosures, and overstating asset values, among others (Chukwudi, et al., 2021).  Bolaji (2020) states that these manipulations can be motivated by numerous factors, such as achieving financial objectives, obtaining loans or investments, artificially increasing stock prices, or concealing underperformance. Eteka (2022) argues that unethical accounting methods have serious and diverse consequences, including the loss of investor trust, regulatory interventions, operational inefficiencies, and damage to reputation. This study intends to assess the impact of unethical accounting practices on the quality of financial reporting in manufacturing firms in Nigeria.

Objectives of the study

The primary objective of this study is to critically assess the effect of unethical accounting practices on financial reporting quality of manufacturing firms in Nigeria. Specific objectives of this study are to:

To identify common unethical accounting practices prevalent in Nigerian manufacturing firms.

To examine the major causes of unethical practices by accounting professionals, when carrying out their financial activities.

To examine the impacts of unethical accounting practices on the quality of financial reporting.

To assess the implications of poor financial reporting quality on stakeholder decision-making and overall firm performance.

To recommend strategies for improving ethical standards and financial reporting quality in the manufacturing sector.

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What are the common unethical accounting practices prevalent in Nigerian manufacturing firms?

What are the major causes of unethical practices by accounting professionals, when carrying out their financial activities?

What are the impacts of unethical accounting practices on the quality of financial reporting?

What are the implications of poor financial reporting quality on stakeholder decision-making and overall firm performance?

What are the strategies for improving ethical standards and financial reporting quality in the manufacturing sector?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: There are no significant impacts of unethical accounting practices on the quality of financial reporting.

Ha: There are significant impacts of unethical accounting practices on the quality of financial reporting.

1.6 Significance of the study

An investigation into the impact of unethical accounting practices on the quality of financial reporting in Nigerian manufacturing companies is crucial for enhancing governance, bolstering investor trust, facilitating informed business choices, informing regulatory changes, safeguarding corporate reputation, and advancing scholarly comprehension in the realm of accounting ethics and governance.

An analysis of the effects of unethical accounting practices on the accuracy of financial reporting might reveal weaknesses in corporate governance and internal controls in Nigerian manufacturing companies. This discovery is of utmost importance for policymakers, regulators, and industry stakeholders who are striving to enhance ethical norms and enhance transparency.

Moreover, the quality of financial reporting has a direct impact on the level of confidence investors have and the effectiveness of capital markets. Unethical activities such as manipulating earnings or providing false information in financial statements can deceive investors, resulting in the improper allocation of capital and weakening market efficiency. Through the examination of these activities, the study can make a valuable contribution towards identifying methods to improve the dependability and trustworthiness of financial information. Precise financial reporting is crucial for efficient company decision-making. Unscrupulous accounting techniques manipulate financial measures and mislead the genuine financial condition of industrial companies. This can result in less than ideal judgements on investments, allocation of resources, and strategic planning. Gaining insight into the consequences of unethical practices can enhance organisations' ability to enhance their decision-making processes.

Moreover, unethical accounting methods frequently contravene accounting norms and legislation. Examining the impacts of these behaviours can offer valuable information on the necessary legal and regulatory changes required to properly discourage and penalise them. This involves enhancing the effectiveness of enforcement procedures and encouraging strict compliance with ethical norms in financial reporting. Manufacturing organisations depend on trust and reputation to preserve relationships with stakeholders, such as customers, suppliers, employees, and the community. Unscrupulous behaviours have the potential to damage the reputation of a company and undermine the trust of those involved. Through the examination of these activities, the research can provide valuable insights on how to cultivate a culture characterised by honesty and responsibility within organisations.

Furthermore, conducting research on the impact of immoral accounting methods in Nigerian manufacturing companies adds to the scholarly body of knowledge on corporate governance, financial reporting, and ethics. The research offers concrete facts and theoretical knowledge that might guide future investigations and instructional programs focused on tackling ethical dilemmas in accounting and business operations.

1.7 Scope of the study

Broadly, this study focus is to critically assess the effect of unethical accounting practices on financial reporting quality of manufacturing firms in Nigeria. Specifically, this study seeks to identify common unethical accounting practices prevalent in Nigerian manufacturing firms, examine the major causes of unethical practices by accounting professionals, when carrying out their financial activities and examine the impacts of unethical accounting practices on the quality of financial reporting.  Further, this study will focus on assessing the implications of poor financial reporting quality on stakeholder decision-making and overall firm performance and it also seeks to recommend strategies for improving ethical standards and financial reporting quality in the manufacturing sector. Geographically the study is carried out in  Oyo state, Nigeria. 

1.8 Limitations of the study

Like in any human attempt, the researchers encountered several small limits during the investigation. The primary constraint was the dearth of comprehensive literature on the topic, given the scarcity of data pertaining to the effect of unethical accounting practices on financial reporting quality of manufacturing firms in Nigeria. Therefore, a substantial investment of time and effort was required to identify the suitable materials, books, or information and to collect data. Moreover, this study is limited by its diminutive sample size and restricted geographical range, concentrating just on Nigeria. Hence, the findings of this study cannot be extrapolated, thereby necessitating additional research. 

Furthermore, the researcher's restraints were predominantly attributable to financial limitations, as they are a student without a means of revenue to support themselves. The research location's high transportation costs, impacted by current inflation in Nigeria, made it difficult to afford transportation fees.

In addition, the researcher encountered a time limitation as a result of the necessity to do this research while simultaneously meeting the responsibilities of attending lectures and engaging in other educational pursuits.

1.9 Definition of terms

Ethical accounting practice: Accounting ethics is the collective standards and guidelines that accounting professionals must follow to prevent fraudulent practices and maintain public confidence in their profession.

Unethical accounting practice: Unethical accounting practices are actions that a company uses to break the GAAP (Generally Accepted Accounting Principles) rules. It includes understating a company's worth or providing lousy inventory. Forces that encourage unethical accounting practices. Pressure to maintain a good company image.

Financial reporting quality: Financial reporting quality can be thought of as spanning a continuum from the highest (containing information that is relevant, correct, complete, and unbiased) to the lowest (containing information that is not just biased or incomplete but possibly pure fabrication).

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