AN EXAMINATION OF THE IMPACT OF ETHICAL PRACTICES IN FINANCIAL REPORTING ON COMMERCIAL BANKS IN LAGOS
Same Topic: You can replace it with any of the Topic Below
A STUDY ON THE IMPLICATIONS OF ETHICS IN FINANCIAL REPORTING ON MONEY DEPOSIT BANKS IN LAGOS
AN ANALYSIS OF THE EFFECTS OF ETHICAL STANDARDS IN FINANCIAL REPORTING ON DEPOSIT-TAKING BANKS IN LAGO
| PAGES = 54 | CHAPTER = 1 – 5 |
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The concept that an organization’s financial statements are required to follow a comprehensive set of rules and guidelines established by accounting principles, policies, methodologies, and systems is widely endorsed. This framework ensures that financial reporting is conducted in a standardized manner, promoting consistency and accuracy across various entities. The broad support for this idea reflects a collective agreement on the importance of adhering to these established accounting norms to maintain transparency and reliability in financial reporting.
Accountants must apply their best judgment in line with generally accepted accounting principles to accurately record transactions and events not specifically covered by official statements. Therefore, professionals managing these documents must uphold strong accounting ethics to develop a financial reporting template that is both robust and widely accepted, as noted by Ikoh (2019).
Ethics are defined as the moral principles that govern human behavior, as noted by Hornby (2020). Both ethics and the concept of moral acceptability use similarity as a benchmark for determining acceptable conduct. For accountants and auditors, their reports must be precise, dependable, realistic, and impartial to be credible, according to Salaudeen, Ibikunle, and Chima (2018). However, recent business developments have raised questions about whether ethical accounting practices truly align with reliable financial reporting, as observed by Salaudeen et al. (2018).
The goal of financial reporting is to enable users to assess the financial and service performance, financial position, and cash flows of the reporting entity, as explained by Ezeani et al. (2022). This involves complying with all relevant legal requirements, regulations, common law, and contractual obligations related to evaluating the entity’s financial and service performance, financial condition, and cash flows, as well as deciding whether to allocate resources to or engage in business with the reporting entity.
Accounting professionals are given the important task of preparing financial reports. To ensure these reports are accurate, timely, comprehensive, relevant, and authentic, it is crucial for them to follow ethical accounting standards. Ogbonna and Appah (2021) support this, noting that corrupt practices within companies are deeply ingrained. Clearly, financial reports play a central role in the decision-making process. Financial reporting is crucial for evaluating an organization’s effectiveness, profitability, sustainability, and progress. Consequently, the ethical choices made by an accountant have significant impacts on both their own life and the lives of others. Talebnia, Salehi, and Jabbarzade (2021) argue that there is a limit to the quality of financial reporting concerning the integrity of an entity’s financial statements, economic condition, and operations over time. Additionally, it is well-recognized that business practices, environments, and cultural factors can varyingly affect the value and reliability of financial reporting, as noted by Gois (2018).
Research by Ogbonna and Ebimobowei (2021), which explored the link between accountants’ adherence to ethical standards and the performance of listed companies in Nigeria, found that both the quality of financial reporting and organizational performance were positively and significantly influenced by accountants’ compliance with ethical standards. People tend to place high trust in financial reports audited by certified public accountants, as they believe these reports are grounded in a thorough adherence to professional ethics and standards of conduct, according to Adeyeye, Adeyemi, and Otusanya (2020). In other words, accounting ethics should impact the reliability of financial reports.
Individuals rely on the financial statements prepared by accountants to make informed financial decisions. Salaudeen, Ibikunle, and Chima (2018) emphasize that for these statements to be credible and influential, accountants and auditors must ensure that the information they present is effective, reliable, realistic, and free from bias. However, recent developments in the business sector suggest that there is not a strong correlation between accounting ethics and the accuracy of financial reports (Salaudeen et al., 2018). Furthermore, Saladeen et al. (2018) argue that accountants’ ethical attitudes and the repercussions of their actions are increasingly being overlooked in the process of reporting financial performance.
For instance, Verdi (2019) defines financial reporting quality as “the precision with which financial reports convey information about a company’s operations, especially its cash flows, to inform shareholders.” It is clearly recommended that financial statements should accurately represent the economic condition of the reporting entity. Consequently, accountants who do not adhere to ethical standards can significantly undermine the quality of financial reporting. This issue is particularly critical when it comes to safeguarding shareholders’ interests, as such unethical behavior may lead to a prioritization of personal or organizational financial gain over the accurate portrayal of financial health.
In addition to their responsibilities to direct clients, accountants are obligated to various other groups, including the general public, governmental bodies, suppliers, shareholders, creditors, debenture holders, and employees (Appah, 2020). Upholding established accounting norms necessitates that accountants operate with a high level of ethical conduct. Ethical behavior in accounting is crucial because it encompasses moral considerations that impact not only the accountants themselves but also the stakeholders who depend on the accuracy and integrity of their financial data (Klai & Omri, 2021). When accountants and the broader accounting community commit to and uphold strong ethical standards, it is likely to lead to improvements in the quality of financial reporting. This commitment to ethics can contribute significantly to the reliability and transparency of financial statements, which in turn benefits all parties involved. One of the key reasons for conducting this study is to examine the implications of ethical practices on financial reporting within money deposit banks in Lagos, with the aim of understanding how these practices influence the accuracy and effectiveness of financial disclosures in the banking sector.
1.2 Statement of Problem
Accountants sometimes encounter ethical dilemmas (Babayanju et al., 2017). Throughout their work, they may face situations that challenge their moral judgment. The essence of professionalism in accounting relies on accountants’ commitment to ethical standards and their ability to distinguish between public and private interests (Babajanyu et al., 2017).
Joseph and Dike (2014) suggest that the failure of some businesses can be attributed to accountants’ neglect of the standards expected by financial report users and their inherent skepticism. Instances of business failures and scandals have led to increased scrutiny of accountants’ financial reports. Aguolu (2018) asserts that these failures were due to accountants not adhering to established conduct rules, which affected the reliability of financial statements for end users. As a result, it is crucial that financial statements are prepared with meticulous attention. Recent discussions have highlighted various ethical issues, including interactions with insiders, maintaining impartiality, and accepting gifts, among others. Experts indicate that various ethical issues impact the credibility of financial accounts (Joseph and Dike, 2014). The revised and updated Corporate Governance Code (2011) mandates the establishment of an ethics committee to address and resolve ethical issues and uphold the organization’s ethical standards. However, this measure has not achieved its intended effect, as numerous business scandals from the past century can be traced back to unethical practices, such as auditors and senior management prioritizing personal interests over those of the organization (Gois, 2018). Due to this gap between theoretical expectations and actual practices, it is crucial to evaluate the ethical issues within businesses and their influence on the reliability of financial reports. Consequently, this project aims to investigate whether accounting ethics impact the reliability of financial reports.
Under the Corporate Governance Code (2011), all organizations registered in Nigeria are mandated by law to establish an ethics committee. This committee is primarily responsible for addressing ethical concerns and fostering ethical values within the institution. However, as noted by Ezeani et al. (2022), the effectiveness of these committees has been limited, as several business crises linked to ethical issues have not been resolved satisfactorily through their efforts. In the past century, several notable corporate scandals have occurred, including Cadbury Plc’s inflation of financial reports, the failure to disclose African Petroleum’s N22 billion debt burden, and banks conspiring to commit fraud with internal auditors (Enofe et al., 2019). A thorough examination of these crises reveals that they stem from a disregard for ethical principles. As a result, it is important to explore the impact of ethical practices on financial reporting, particularly within money deposit banks in Lagos.
1.3 Objectives of the Study
The overarching aim of this study is to explore the effects of ethical principles on financial reporting practices within money deposit banks in Lagos. To address this broad objective, the study has delineated the following specific goals:
i. Assess the impact of the accounting ethical principle of objectivity on the quality of financial reporting within money deposit banks in Lagos. This involves evaluating whether maintaining objectivity in accounting practices contributes to more accurate and reliable financial statements.
ii. Examine the influence of the accounting ethical principle of integrity on the quality of financial reporting in money deposit banks in Lagos. This objective seeks to determine if adherence to integrity in financial reporting results in greater trustworthiness and transparency in the financial statements produced by these banks.
iii. Investigate the effect of the accounting ethical principle of professional independence on the quality of financial reporting in money deposit banks in Lagos. This entails analyzing whether ensuring that accountants and auditors remain independent from external influences enhances the accuracy and objectivity of financial reports.
1.4 Research Question
The study will be directed by the following research questions:
To what extent does the principle of objectivity in accounting affect the quality of financial reporting within money deposit banks in Lagos?
How does the principle of integrity in accounting impact the quality of financial reporting in money deposit banks in Lagos?
In what ways does the principle of professional independence in accounting influence the quality of financial reporting in money deposit banks in Lagos?
1.5 Research Hypotheses
Ho1: The principle of objectivity in accounting does not significantly impact the quality of financial reporting in money deposit banks in Lagos.
Ho2: The principle of integrity in accounting does not have a significant effect on the quality of financial reporting in money deposit banks in Lagos.
Ho3: Professional independence in accounting does not significantly influence the quality of financial reporting in money deposit banks in Lagos.
1.6 Significance of the Study
This study will offer substantial benefits in several ways. First, it will provide valuable insights to stakeholders from various organizations on how to maintain adherence to ethical principles, thereby helping to prevent business failures and corporate scandals. Second, it will promote strict adherence to accounting ethics codes among accountants, ensuring that certain key aspects of reliability are incorporated into financial reporting practices. Third, the findings from this research will assist stakeholders in making informed decisions regarding investments, financing, and dividends, ultimately supporting the overall corporate performance of their organizations. Fourth, the study will foster a strong sense of professionalism, honesty, sincerity, and integrity among accountants by highlighting how engaging in fraudulent activities can damage their personal and professional reputations and compromise the credibility of the financial information they provide. Lastly, this research will serve as a valuable resource for students, researchers, and scholars interested in conducting further studies on this topic.
1.7 Scope Of The Study
This study focuses on examining the impact of ethics on financial reporting within money deposit banks in Lagos. The scope is restricted to data from nine (9) internationally authorized money deposit banks operating in Lagos State. The research is constrained by the availability of data and time limitations. Additionally, the study includes references to certain publications from the Institute of Chartered Accountants of Nigeria (ICAN).
1.8 Limitation Of The Study
As with any research endeavor, the researcher faced some challenges during the study. Limited funding affected the ability to access relevant materials, literature, and information, which in turn influenced the choice of a smaller sample size. Additionally, the researcher was balancing this study with other academic commitments, which resulted in a reduced amount of time available for research activities.
1.9 Definition of Terms
Ethics: This term refers to a set of moral principles that guide behavior and decisions, particularly those related to a specific group, profession, or type of conduct. Ethics encompass the standards and norms that dictate what is considered right and wrong in various contexts.
Accounting Ethics: This area of study is a branch of applied ethics, closely related to both business ethics and human ethics. Accounting ethics examines the moral values and judgments pertinent to the practice of accountancy. It involves evaluating how ethical principles apply to accounting practices and decisions, aiming to ensure integrity and fairness in financial reporting.
Financial Report: A financial report (or financial statements) is an official document that records the financial activities and status of a business, individual, or other entity. Key components of financial reports include the balance sheet, income and expenditure statement, statement of retained earnings, and cash flow statements. These reports must be organized and presented in a clear, structured format that is easily understandable to the end users, allowing them to make informed decisions based on the financial information provided.
Objectivity: Objectivity in financial reporting requires that the reports be presented independently and based on impartial evidence. This principle ensures that the financial information is free from personal biases or external influences, and is supported by factual, unbiased data. The objective of this principle is to provide a clear and honest representation of an entity’s financial status, unaffected by subjective interpretations or external pressures.
Integrity: Integrity in financial reporting demands that the information provided be accurate, dependable, and truthful. This principle emphasizes the importance of honesty and transparency in the preparation of financial reports. Integrity ensures that all financial statements reflect a true and fair view of the entity’s financial condition and operations, without any misrepresentation or distortion of facts.
Professional Independence: Professional independence refers to the freedom of accountants from any form of control or influence exerted by external parties or stakeholders. This principle asserts that accountants must be allowed to prepare financial reports without any internal or external pressures that could compromise their objectivity. Professional independence is crucial for ensuring that financial reports are created with impartiality and without any undue interference, maintaining the credibility and reliability of the financial information provided.