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INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARD (IPSAS) AND THE FINANCIAL REPORTING QUALITY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

With the growing emphasis on transparency and disclosure of financial information globally, there have been initiatives to boost public trust in financial reporting and reinforce the resilience of globalisation through international trades, investments and collaborations (Beredugo, Igbeng, & Eze, 2013). Given the importance of holding governments accountable for their results, it is crucial to have high-quality financial reports. These reports serve as the primary means of communicating an organization’s financial affairs to stakeholders. However, even with the adoption of accrual-based International Public Sector Accounting Standards (IPSAS) by certain state governments in Nigeria, concerns remain about the credibility of their financial reports. It may be due to a lack of proper infrastructure, which requires well-trained staff who can accurately interpret the standards and provide thorough explanations of financial data using narrative notes alongside the financial statements. There is another gap that needs to be addressed – a shift in finance culture and mindset to take advantage of opportunities for value creation. Reports from specific Nigerian states highlight audit qualifications regarding the government’s assets, income, receivables, excessive spending and investment property. Dealing with technical accounting issues and challenges can be quite complex. These include matters such as valuation, depreciation, impairments and fair value of investment property. It’s worth noting that in certain states, the current technology may not fully support the implementation of International Public Sector Accounting Standards (IPSAS) as desired (Izueke, Onah, Ugwuibe, Okwueze, Agu, Ugwu & Ezeibe, 2020).

IPSAS is a crucial aspect of the worldwide government accounting revolution, addressing the need for greater government accountability and financial transparency. Nevertheless, concerns regarding the comparability, reliability and relevance of financial information emerge within IPSAS, resulting in noteworthy modifications with important consequences. IPSAS also brings in new standards that may be unfamiliar to the Nigerian government financial reporting system, thus having a homogenising impact. According to Izueke, Onah, Ugwuibe, Okwueze, Agu, Ugwu and Ezeibe (2020), International Public Sector Accounting Standards (IPSAS) are a set of accounting standards developed by the International Public Sector Accounting Standards Board (IPSASB) to be applied by public sector entities. IPSAS aims to improve financial reporting in the public sector by providing a comprehensive framework for the preparation and presentation of financial statements. These standards are designed to enhance transparency, accountability and comparability in the financial reporting of governments, government agencies and other public sector entities worldwide. IPSAS covers various aspects of financial reporting, including recognition, measurement, presentation and disclosure of financial information. It establishes principles and guidelines for the preparation of accrual-based financial statements, which reflect the economic substance of transactions and events rather than just focusing on cash flows. By adopting accrual accounting, IPSAS enables a more comprehensive and accurate representation of an entity’s financial position, performance and cash flows.

IPSAS has different and varied objectives. According to Ugwumadu (2015), one of the key objectives of IPSAS is to promote transparency and accountability in the public sector. By providing clear guidelines for financial reporting, IPSAS helps ensure that public sector entities disclose relevant and reliable information to their stakeholders, including citizens, taxpayers, investors and international organizations. This transparency not only allows for better decision-making but also increases public trust and confidence in the management of public funds. Furthermore, IPSAS facilitates comparability across different public sector entities. By implementing consistent accounting policies and standards, IPSAS enables users of financial statements to make meaningful comparisons between entities, both within and across countries. To Babatunde (2017) this comparability is essential for benchmarking, evaluating performance and promoting best practices in financial management and accountability. IPSAS also addresses specific accounting issues and challenges unique to the public sector. It provides guidance on areas such as revenue recognition, expense recognition, asset valuation, measurement of liabilities, presentation of financial statements and disclosure requirements. These guidelines help public sector entities overcome complexities related to funding sources, budgetary control, public-private partnerships, grants and the unique characteristics of public sector operations.

In recent years, there has been an increased global adoption of IPSAS. Many countries and international organizations have recognized the benefits of harmonizing financial reporting practices in the public sector and aligning them with international standards. This adoption promotes consistency, facilitates cross-border cooperation and enhances the credibility and comparability of financial information. It is in line with the above discussion that this study seeks to examine International public sector accounting standard (IPSAS) and the financial reporting quality in Nigeria.

1.2 Statement of the Problem

The ideal situation is to have high-quality financial reporting in Nigeria’s public sector that adheres to international standards, specifically the International Public Sector Accounting Standards (IPSAS). This would ensure transparency, accountability and effective resource management. However, there is a concern regarding the extent of utilization of IPSAS and its impact on the financial reporting quality in Nigeria’s public sector. Despite efforts to adopt IPSAS and improve financial reporting, there are indications that the utilization of IPSAS and the overall financial reporting quality in Nigeria’s public sector remain suboptimal.

Over time, various measures have been implemented to address the issue. These include training programs and capacity building initiatives to enhance the knowledge and skills of public sector accountants and finance professionals. Additionally, guidelines, regulations and policies have been developed to promote the adoption and implementation of IPSAS. Despite these measures, challenges persist in achieving widespread utilization of IPSAS and improving financial reporting quality. There are factors such as limited resources, inadequate infrastructure, lack of awareness, resistance to change and institutional barriers that hinder the effective implementation of IPSAS. The inadequate utilization of IPSAS and the resulting low financial reporting quality in Nigeria’s public sector have significant consequences. It leads to a lack of transparency and accountability in financial transactions, making it difficult to assess the true financial position and performance of public sector entities. This, in turn, affects decision-making processes, resource allocation and public trust in the government’s financial management.

Therefore, it is crucial to conduct research to comprehensively examine the extent of IPSAS utilization and its impact on financial reporting quality in Nigeria’s public sector. This research aims to identify the underlying factors contributing to the underutilization of IPSAS and the challenges faced in improving financial reporting. By understanding these factors, effective strategies can be developed to enhance IPSAS implementation and improve financial transparency and accountability. While previous studies have examined financial reporting in the public sector and the adoption of IPSAS in Nigeria, there is a need to specifically assess the relationship between IPSAS utilization and financial reporting quality in Nigeria’s public sector. This research will bridge the gap in knowledge by providing a comprehensive analysis of the current state of IPSAS utilization and its impact on financial reporting quality.

In conclusion, this research aims to contribute to the understanding of the extent of IPSAS utilization and its influence on financial reporting quality in Nigeria’s public sector. The findings will provide valuable insights to policymakers, regulators and practitioners in formulating effective strategies to overcome barriers, enhance IPSAS implementation and ultimately improve financial transparency and accountability in the public sector.

1.3 Aim and Objectives of the Study

            The main aim of this study is to examine the international public sector accounting standard (IPSAS) and the financial reporting quality in Nigeria. The specific objectives of the study are:

1. To assess the level of adoption and implementation of IPSAS in the Nigerian public sector.
2. To evaluate the impact of IPSAS adoption on the financial reporting quality in Nigeria.
3. To identify challenges and barriers to achieving high-quality financial reporting under IPSAS in Nigeria.
4. To propose recommendations for enhancing the financial reporting quality under IPSAS in Nigeria.

1.4 Research Questions

            The following research questions guided the study:

1. What is the level of adoption and implementation of IPSAS in the Nigerian public sector?
2. What is the impact of IPSAS adoption on the financial reporting quality in Nigeria?
3. What are the challenges and barriers faced in achieving high-quality financial reporting under IPSAS in Nigeria?
4. What recommendations can be proposed to enhance the financial reporting quality under IPSAS in Nigeria?

1.5 Hypotheses

The following null hypotheses will be tested at 0.05 level of significance:

• There is no significant relationship between the level of adoption and implementation of IPSAS in the Nigerian public sector.
• There is no significant impact of IPSAS adoption on the financial reporting quality in Nigeria.
• There is no significant relationship between the challenges and barriers faced in achieving high-quality financial reporting under IPSAS in Nigeria.
• There is no significant relationship between the proposed recommendations and the enhancement of financial reporting quality under IPSAS in Nigeria.

1.6 Significance of the Study

The findings of the study can provide valuable insights to the Nigerian government in understanding the current state of financial reporting quality in the public sector and the impact of IPSAS adoption. The government can use this information to assess the effectiveness of IPSAS implementation, identify areas for improvement and make informed policy decisions to enhance financial reporting practices.

The study can benefit public sector entities in Nigeria by shedding light on the challenges and barriers that hinder high-quality financial reporting under IPSAS. The findings and recommendations can help these entities in addressing specific issues and improving their financial reporting processes, ultimately leading to enhanced transparency, accuracy and comparability of financial information.

The study can be beneficial to users of financial statements, such as investors, creditors and other stakeholders. By evaluating the impact of IPSAS adoption on financial reporting quality, the study can provide users with insights into the reliability and relevance of financial information reported by Nigerian public sector entities. This can enable users to make more informed decisions, assess the financial health of entities and evaluate their performance.

The study can contribute to the existing body of knowledge on IPSAS adoption and financial reporting quality, particularly in the Nigerian context. The findings and recommendations can serve as a resource for academia and researchers interested in studying the implementation of IPSAS in developing countries or exploring the relationship between IPSAS adoption and financial reporting practices.

International organizations and standard-setting bodies involved in promoting best practices in public sector financial reporting, such as the International Federation of Accountants (IFAC) and the International Public Sector Accounting Standards Board (IPSASB), can benefit from the study’s findings. The insights provided by the study can help these organizations in refining and improving IPSAS standards and guidance, considering the challenges and experiences faced in Nigeria.

1.7 Scope and Delimitation of the Study

The scope of the study encompasses an examination of the adoption and implementation of IPSAS in the Nigerian public sector and its impact on financial reporting quality. The study will focus on 1 public sector entity in Plateau state such as Plateau State Internal Revenue Service (PSIRS) and also two banks which are First Bank of Nigeria and United Bank for Africa (UBA). This is because these entities are required to comply with IPSAS. The assessment of financial reporting quality will consider aspects such as transparency, accuracy, completeness and comparability of financial information. The study will also identify the challenges and barriers faced in achieving high-quality financial reporting under IPSAS in Nigeria. However, the study’s delimitation lies in not including an extensive analysis of the broader macroeconomic factors or an assessment of the effectiveness of specific IPSAS standards. Additionally, the study will primarily rely on existing literature, reports and data available up to the date of the study, without conducting primary data collection through surveys or interviews.

1.8 Operational Definitions of Terms

International Public Sector Accounting Standards (IPSAS): In this study, IPSAS refers to the set of accounting standards established by the International Public Sector Accounting Standards Board (IPSASB). IPSAS provides guidelines and principles for the preparation and presentation of financial statements in the public sector. It encompasses standards, interpretations and frameworks that aim to enhance transparency, comparability and accountability in the financial reporting of public sector entities.

Financial Reporting Quality: In the context of this study, financial reporting quality refers to the extent to which financial statements prepared by public sector entities in Nigeria accurately and transparently reflect the financial position, performance and cash flows of the entities. It encompasses the reliability, relevance, comparability, completeness and understandability of financial information reported in accordance with IPSAS.

Adoption and Implementation of IPSAS: Adoption refers to the formal acceptance and application of IPSAS by public sector entities in Nigeria as the basis for preparing financial statements. Implementation, on the other hand, refers to the practical steps taken by these entities to align their accounting policies, procedures and systems with IPSAS requirements. It involves the integration of IPSAS principles, guidelines and practices into the financial reporting processes of the entities.

Challenges and Barriers: Challenges and barriers refer to the obstacles, difficulties, or limitations faced by Nigerian public sector entities in achieving high-quality financial reporting under IPSAS. These may include technical challenges, such as complexities in applying certain IPSAS standards, resource constraints, capacity gaps, cultural or organizational barriers, or legal and regulatory constraints that hinder the effective adoption and implementation of IPSAS.