DETERMINANTS OF ACCOUNTING QUALITY OF NIGERIAN BANKS
ABSTRACT
This study aims to investigate the quality of accounting information in Nigerian Banks and its relationship with some attributes (performance, leverage and audit size). It purposes to find some determinants of accounting quality (AQ) considering the most cited theory in this regard, agency theory, in order to test if this theory is supported in Nigeria. The sample of the study consists of 14 banks listed on the Nigerian Stock Exchange (NSE). This study also does a longitudinal analysis with the aim of assessing the trend of AQ in Nigeria over a five-year period (2011-2015). To test the association between the level of AQ and some banks` attributes, we used data for panel regression analysis. Results of the regression analysis indicate that leverage and audit size are significantly related to accounting quality, while performance has statistically insignificant relationship with accounting quality. This study also reveals areas of improvements for Nigerian Banks reporting quality accounting information in financial statements.
Keywords: Accounting Quality, Agency Theory, Bank’s Characteristics
TABLE OF CONTENT
CHAPTER ONE - INTRODUCTION    
1.1    Background of the Study    
1.2    Statement of Research Problem    
1.3    Objectives of Study    
1.4    Research Questions    
1.5    Research Hypotheses    
1.6    Significance of the Study    
1.7    Scope of the Study    
    CHAPTER TWO – LITERATURE REVIEW    
2.1    Definition of Accounting Quality (AQ)    
2.2    International Financial Reporting Standard (IFRS) and Accounting Quality (AQ)    
2.3    Determinants of Accounting Quality (AQ)    
    2.3.1    Performance and Accounting Quality    
    2.3.2    Leverage and Accounting Quality    
    2.3.3    Auditor Size and Accounting Quality    
2.4    Prior Research Studies on Bank Characteristics & Accounting Quality    
CHAPTER THREE - METHODOLOGY    
3.1       Theoretical Framework    
3.2    Agency  Theory    
    3.2.1    Performance
3.2.2     Levearge
3.2.3     Auditor Size    
3.3    Model Specification    
3.4    Research Design    
3.5    Population Size    
3.6    Sampling and Sample size    
3.7    Sources and Method of Data Collection    
3.8    Data Analysis    
  CHAPTER FOUR – PRESENTATION AND INTERPRETATION OF DATA    
4.1    Descriptive Statistics    
    4.1.1    Normality Test    
4.2    Pearson Correlation Coefficient    
4.3    Interpretation of Regression Analysis    
    4.3.1    Economic or A Priori Criterion    
    4.4.2    Statistical Criterion also known as First-Order Test    
4.4    Evaluation of the Hypothesis    
4.5    Policy Implications    
    CHAPTER FIVE – SUMMARY, RECOMENDATIONS AND CONCLUSION    
5.1    Summary of Findings    
5.2    Recommendations     
5.3    Conclusions      
References     
Appendix I    Descriptive Statistics    
        Pearson Correlation Coefficient    
        Panel Least Squares    
Appendix II    List Of Nigerian Banks listed on the Nigerian Stock Exchange    
Appendix III    Construct of Independent Variables and Data Collection Processes    
CHAPTER ONE
INTRODUCTION
Background to the Study
Accounting Quality is the extent to which accounting information accurately reflects the company’s current operating performance, is useful in predicting future performance, and helps assess firm value (Deschow & Schrand, 2004 as cited in Hribar, Kravet and Wilson, 2011).
The empirical study conducted in this paper examines the determinants of accounting quality in the Nigerian Banking Sector. The main goal is to study closely certain characteristics of banks such as performance, leverage and auditor size. These characteristics being determinants of accounting quality disclosure practices have been established in disclosure studies through explanations provided by agency theory.
The quality of financial statements is not an indicator that can be easily quantified, as it cannot be observed directly, being based on the perception of the users of financial information. Each category of users has its own expectations and perceptions regarding what information is useful and of good quality (Achim & Chis, 2014).
In the field of economics and accounting, recent studies are analysing more and more the term of accounting quality. One of the main objectives of the large number of studies on this subject is finding an appropriate measure for it. That is why, it is important to understand what accounting quality represents and how it can be explained and quantified.
As analyzed and further explained in the sample description section of this paper, about 86% of Nigerian Banks rely on external borrowing to finance their operations.  In terms of the auditor size, only one bank out of the 14 banks does not engage the service of the “Big four”. This fact should be accounted and taken as one of the factors influencing the quality of financial reporting (Atanasovski, 2013).
The remainder of the paper is organized as follows. Chapter 2 presents previous literature related to the determinants of accounting quality and describes the development of the hypotheses. In Chapter 3, the research design is explained, including a description of the dependent and the independent variables. Chapter 4 discusses the sample selection process and its characteristics, the results of the content analysis of banks’ financial statements including areas of disclosure deficiencies, and the results of the regression analysis. Section 5 summarizes main results and conclusions from the study.
Statement of Research Problem
The primary objective of financial reporting is to provide quality financial reporting that is useful in making decisions about providing resources to the entity and in assessing whether the management of the entity have made efficient and effective use of the resources provided (IASB, 2010). The quality of the financial reporting has been receiving greater attention, especially after recent accounting scandals.
This study tends to find out whether Nigerian banks adhere to accounting reporting quality by using Performance, Leverage and Audit Size as key variables.
Previous studied have shown that profitability may influence the disclosure quality of a financial statement. A firm will be interested in disclosing good news to the market in order to avoid the undervaluation of their shares and reduce capital costs (Trueman, 1986). Since firms exist in order to maximise shareholders’ wealth, hence the need to ensure quality accounting reporting.
Objectives of the Study
The main objective of this study is to examine the determinants of accounting quality of Nigerian Banks using performance (return on capital employed), leverage (debt ratio) and audit size as proxies of accounting quality. The other objectives are to:
            Investigate whether there is a significant relationship between bank’s      performance, in terms of returns  on equity with accounting quality
Ascertain whether auditor size significantly impacts on the accounting quality of banks.
Find out whether leverage have a direct relationship with accounting quality
Research Questions
Specified below are research questions that are invaluable for the completion of this study:
Is there significant relationship between bank’s performance and accounting quality?
Does auditor size have any significant impact on the accounting quality of banks?
Is there any direct or significant relationship between leverage and accounting quality of banks?
Research Hypothesis
The researcher expects that with the adoption of IFRS in 2012 by Nigerian banks, the accounting quality of the banks will be much more emphasized. Accounting Quality is the extent to which accounting information accurately reflects the company’s current operating performance; it is useful in predicting future performance, and helps assess firm value (Deschow & Schand, 2004). The under listed hypothesis are tested in order to draw inferences as to the level of accounting quality in Nigerian banks.
H0:1 There is no significant relationship between bank’s performance and accounting quality.
H0:2   There is no significant impact of auditor’s size on the accounting quality of the bank
H0:3 There is no relationship between the bank’s leverage position and accounting quality.
Significance of the Study
Professional Bodies (financial analysts, audit firms) will benefit from this research work because it will give them a clearer view on the importance as well as the need for high accounting quality. Information on accounting quality as examined in this study would provide important guidelines to various stakeholders, including potential foreign investors and creditors, in determining banks’ performance and future prospects. It also serves as a beacon for other researchers that are involved in carrying out studies on banks in developing economies like Nigeria. Finally, this study serves as a reference point for subsequent research on accounting quality practices among Nigerian banks.
Scope of the Study
The study is empirical in nature and it is centered on the determinant of accounting quality in Nigerian banks. The population size is the 15 commercial banks in Nigeria listed on the Nigerian Stock Exchange as at 31st December, 2015. However, data for one of the commercial banks were not available; hence the population size was reduced to 14 banks.
The Annual Financial Reports and Accounts for 2011- 2015 of the listed banks were examined.