AN ASSESSMENT OF THE ADEQUACY OF

FINANCIAL STATEMENTs (BANKS)

BY
OLUTOYIN O. OLUSINA
ACCOUNTING DEPARTMENT
UNIVERSITY OF ABUJA, NIGERIA
(toyjoy20@yahoo.com)

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CHAPTER ONE
INTRODUCTION
1.1

GENERAL OVERVIEW
In any business, effectiveness and efficiency can only be achieved if the management
has the capability to read, understand and analyze the companys financial statement.
Financial statements are records that provide an indication of an individual,
organization or a business enterprise. They are documents the government relies upon
for the assessment of taxes payable to them.
Financial statements provide information useful in investment and credit decisions
and in assessing cash flow prospects. They provide information about an enterprise's
resources, claims to those resources, and changes in the resources.
Financial reporting is a broad concept encompassing financial statements, notes to
financial statements and parenthetical 'disclosures, supplementary information (such
as changing prices), and other means of financial reporting (such as management
discussions and analysis, and letters to stockholders). Financial reporting is one
source of information needed by those who make economic decisions about business
enterprises.
In Nigeria, under section 334(2) of Companies and Allied Matters Act (CAMA) 1990;
the financial statements of companies consist:
a)

The balance sheet as at the last day of the year

b)

A profit and loss account or in the case of a company not trading for profit, an
income and expenditure account for the year;

c)

Notes on the accounts

d)

The auditors reports

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e)

The directors report

f)

In the case of a holding company, the group financial statements.

Numerous indigenous Companies in Nigeria participate minimally in the Nigerian

government activities and they also lack resources facilitating investment attitude;
thus these contributed to the unpredictable financial reporting.
Although, organized and cultured Companies regardless of the limitation still
maintain regular financial statements; while some others are monitored by authorized
institutions e. g Commercial Banks, Travel and Tours Agencies.
The Securities and Exchange Commission has for many years been a strong leader in
international efforts to develop a core set of accounting standards that could serve as a
framework for financial reporting in cross-border offerings. It has repeatedly made the
case that issuers wishing to raise capital in more than one country are faced with the
increased compliance costs and inefficiencies of preparing multiple sets of financial
statements to comply with different jurisdictional accounting requirements.
According to Mr. Alan Kyerematen, director of the Enterprise Africa programme of
the UN Development Programme (UNDP), markets, along with other sources of
financing, can promote private enterprise expansion and thus stronger national
economic growth. "If you have stronger companies that have greater access to capital
for their growing businesses then there is the potential for creating more sustainable
jobs, which can also lead to a reduction in poverty," he told Africa Recovery (ROSC,
2004).
With the above tips, this study will clearly state the position of companies in
presenting annual financial statement according to the standardized adequacy. There

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are standardized measures which will be introduced in the course of this study either
to amend or improve the unproductive and non standard financial statements in
organizations for better economic activities in Nigeria.
1.2

THE STATEMENT OF THE PROBLEM

Financial statements are to provide information about the financial position,
performance and the changes in financial position of an entity that is useful to a wide
range of users in making economic decisions (IASCF, 1989:12). Nigeria is making
efforts to attract foreign investments into the economy. Foreign direct investments
(FDI) in Nigeria exceeded US$1 billion in 2002. Nigeria continues to attract low
quality FDI in manufacturing. In this regard, there is little evidence of the
participation of foreign affiliates in the country, to the process of integration into the
regional and global production networks of the transnational corporations that
characterize more advanced strategic corporate response to globalization. Few and
very basic linkages exist between foreign companies and local suppliers. International
investors require comparable financial information from countries competing for
foreign investments. This requires that Nigerian corporate sector comply with
globally acceptable standards and codes. Nigeria has created a statutory framework to
regulate business activities, including the establishment of regulatory institutions to
enforce standards and codes however, they have been ineffective. (ROSC, 2004).
In a study conducted by the World Bank Group on the observance of standards and
codes for Nigeria, it is observed that the Nigerian financial reporting practices are
deficient (ROSC, 2004:1). The Statements of Accounting Standards (SASs) seem to
be incomplete because there are many accounting issues not yet covered in these
standards which had been addressed by the International Financial Reporting

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Standards (IFRSs). Over the years, extensive revisions have been conducted on the
IFRSs which have not been reflected in the SASs; large sections and paragraphs in
IFRSs which are newly included cannot be found in the SASs. SAS disclosure
requirements have remained unchanged and they are partly based on old IASs that
had been withdrawn by IASB. The SASs does not cover all the aspects of financial
reporting and are not sufficient to form a basis for preparing a high quality financial
statement, in accordance with the IFRS.
Accounting reports of Nigerian companies have been found to be deficient over time
(Wallace, 1988:352; Adeyemi, 2006:193, Nzekwe, 2009:1), in the sense that they lack
vital information that will enable stakeholders make informed decisions. Apart from
the studies conducted by the World Bank, disclosure practices by Nigerian companies
had been empirically investigated by Wallace (1988:352), Okike (2000:39), Adeyemi
(2006:1) and Ofoegbu and Okoye (2006:45). Their observation is quite similar in that
they all found the Nigerian corporate reporting practices to be deficient. Two notable
studies are the doctoral works of Wallace (1988:352) and Adeyemi (2006:1).
Researches on the extent of financial reporting disclosure by using a sample of 47
publicly quoted companies in Nigeria for the period 1982 to 1986. His study won
international recognition and accolade, since this was the first work to show a detailed
analysis of this subject empirically for Nigeria. Nonetheless, one drawback of the
study is that it does not examine the disclosure of specific items of information. It also
does not empirically determine the variability of disclosure as a result of specific
company attributes. Moreover, this study was conducted more than two decades ago
and since then there have been additional reporting standards locally and
internationally, changes in legislation, business and reporting environment and

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securities reporting rules Wallace (1988:352). Adeyemi (2006:1) built on the works
of Wallace by considering SAS 1 to SAS 21 and using a sample of 96 listed
companies with year end between 2003 and 2004. In addition, he empirically
determined the relationship between disclosure and some company characteristics.
His study is quite noble; however, with the fast pace of changes in the global business
world. We need to be conversant with latest developments in this area of research.
It is against this backdrop that this research plan to discover if Nigerian financial
statements are deficient?
1.3

OBJECTIVES OF THE STUDY

The general objective of the study is to assess the adequacy of Banking Institutions
financial statements:
To meet the general objective, the study will focus on the following specific
objectives:

(i)

to identify the evident of financial statements deficiency in the Nigerian Banking

Industry;

(ii)

to analyze the financial statements adequacy in the sampled bank;

(iii)

to determine the effective mechanisms to monitor Banking Institutions and suggest

measures to improve financial reporting in Nigeria.

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1.4

RESEARCH QUESTIONS
1.

Are the Nigerian banks financial statements adequate?

2.

What are the effective mechanisms to monitor banks financial reporting in

Nigeria?

1.5

HYPOTHESIS OF THE STUDY

Hypothesis to be tested during the course of this research is:
Ho:

There is no significant relationship between company size, company age and

the profits presented in the annual reports and the companys financial
statement adequacy.

H1:

There is a significant relationship between company size, company age and

the profits presented in the annual reports and the companys financial
statement adequacy.

1.6

SIGNIFICANCE OF THE STUDY

1.

The results of the study will highlight prospects for banks to generate the financial
statements that would bring to effect economic development.

2.

It will assist the investors to obtain financial statements that provide basis for
comparison and also enable them to detect fraud in financial statements before it
becomes excessive in organizations.

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1.7

SCOPE OF THE STUDY

In other to achieve the objectives of this study, two approaches were adopted in
executing the objectives: survey and content analysis methods. The survey research
entailed administering questionnaire to a random sample of accountants and
accounting information users i.e. employees, stockbrokers and shareholders in the
Federal Capital Territory- Abuja. The primary survey was conducted from the second
quarter to the last of the year 2012. It identifies the opinion of respondents on the
satisfactoriness of financial statements of Nigerian Banking Industry. Content analysis
research entails a sample of banks annual reports received by shareholders. The study
covers the annual reports with period ending 2009 - 2011. As at December 2011 there
were a total of 46 Financial Institutions listed in Nigerian Stock Exchange. These
comprise 25 banks and 21 other Financial Institutions.

1.8

LIMITATIONS OF THE STUDY

Some banks concealed information from students who desires such information in
other to maintain the banks secrecy thereby making it difficult for students to gather
information for their research. Also due to the nature of the research, the respondents
are limited to Accountants, Stockbrokers, Employees and Shareholders who
knowledgeable users, conversant with the financial reporting requirements of the
accounting standards.

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1.9

DEFINITIONS OF TERMS
Adequacy:

Being enough in quantity or good enough in quality for a particular

purpose or need.
Annual Report:

An annual report is a comprehensive report on a company's

activities throughout the preceding year. Annual reports are intended to give
shareholders and other interested people information about the company's activities
and financial performance. Most jurisdictions require companies to prepare and
disclose annual reports, and many require the annual report to be filed at the
company's registry. Companies listed on a stock exchange are also required to report
at more frequent intervals (depending upon the rules of the stock exchange involved).
Auditors Report: is a written document prepared by qualified auditors appointed
legally by the company on financial accounts of the company in which the auditors
have examined thus, stating their responsibilities as auditors and expressing their
opinion as to whether the financial statements show the true and fair view.
Balance Sheet is used to provide insight into a companys assets and debts at a
particular point in time. Information about the companys shareholder equity is
included as well. In general, a company lists its assets on the left side of the balance
sheet and its debts and liabilities on the right. Sometimes, however, a balance sheet
has assets listed at the top, debts in the middle, and shareholders equity at the bottom.
Directors Report: is a written document containing a fair view of the development
of the business of the company and its subsidiaries during the year and of their
position at the end of the year, thereby stating the amount the board, consisting of the

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directors recommend to pay as dividend and the amount they propose to carry to
reserves.
Banking Institutions: are institutions that collect funds from the public and place
them in financial assets, such as deposits, loans, and bonds, rather than tangible
property e.g. commercial banks.
Financial Reporting:

is the process of preparing and distributing financial

information to users of such information in various forms. The most common format
of formal financial reporting is financial statement
Notes to the Account: are a series of notes that are referred to in the main body of the
financial statements. The notes give further details on the numbers given in the
accounts. The importance of these numbers should not be underestimated. The
accounts are not complete without the notes.
Profit and Loss Account: also referred to as Income statement, operating statement
or statement of operations is a company's financial statement that indicates how the
revenue (money received from the sale of products and services before expenses) are
transformed into the net income. It displays the revenues recognized for a specific
period, and the cost and expenses charged against these revenues, including write-offs
(e.g., depreciation and amortization of various assets) and taxes. The purpose of the
income statement is to show managers and investors whether the company made or
lost money during the period being reported.

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CHAPTER TWO
LITERATURE REVIEW
2.1

INTRODUCTION
The industrial revolution in Europe laid the foundation for financial reporting as we
have it today. The advent of the joint stock company which enables the public to
provide capital needed by the corporations to acquire machineries and equipment, in
return for shares in the assets of the companies and their profits, brought a new
dimension to record keeping and financial reporting (Adefiranye, 2009).
As put forward by Glautier and Underdown (1997), the legal importance attached to
financial accounting statements stems directly from the need of a capitalist society to
mobilize savings and direct them into profitable investments', The need to inform
these investors - whether big or small - from whom these savings were collected, led
to the growth of financial reporting system of accounting as we now have it.
The major financial statements used by Nigerian corporations are very similar to those
used by their American counterparts. The Income Statement, Balance Sheet,
Statement of Cash, Retained Earnings, Stockholders Equity, and Statement of
Changes in Stockholders Equity. At the end of every year, all publicly listed
companies have to present their financial statements according to the Nigerian
accounting standards and /or according to their country of origins accounting
standard to the Securities and Exchange Commission (SEC) in the format approved
by The Institute of Chartered Accountants of Nigeria (ICAN). (Afolabi and
Krivogorsky, 2005)

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In the report presented by the World Bank and IMF Board - Accounting and Auditing
Practices (ROSC), the review focuses on the strengths and weaknesses of the
accounting and auditing environment that influence the quality of corporate financial
reporting; according to this report, there have been lapses on the part of authorities
who have the compliance responsibilities of financial reporting in Nigeria. (ROSC
2004).
The Companies and Allied Matters Act (CAMA), has voluminous provisions that
include requirements for auditing, disclosures, and preparation and publication of
financial statements. It also provides for the Registrar of Companies at the Corporate
Affairs Commission to monitor compliance with these requirements and specifies
penaltiesalthough outdatedfor companies and their officers in cases of non
compliance.
No effective mechanism exists to monitor and enforce requirements for accounting
and financial reporting provided for in the Companies and Allied Matters Act (1990).
The CAMA empowers the Registrar of Companies at the Corporate Affairs
Commission to regulate compliance with its financial reporting presentation
requirements.
There is however, no capacity at the Corporate Affairs Commission to effectively
fulfill this function. It is a legal requirement to file a copy of the audited financial
statements and directors report with the Commission. There is however no rigorous
enforcement of timely filing. Financial statements of non-listed public and private
companies are not readily available. It seems most companies simply do not comply
with the filing requirements, and sanctions are not applied. There are significant
weaknesses in the enforcement mechanism, which is accentuated by a degree of

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corruption and poor recordkeeping by the Corporate Affairs Commission (CAC).

CAMA requires that the audit committee review audited financial statements and
report to the shareholders. However, authorities and others have not assessed the
effectiveness of audit committees, making their capacity to monitor unknown.
The Securities and Exchange Commission is not yet effective in monitoring
compliance with financial reporting requirements and enforcing actions against
violators. On behalf of the SEC, the Nigerian Stock Exchange monitors compliance
with financial reporting requirements of companies whose equity or debt securities
are publicly traded.
The SECs capacity to effectively monitor compliance with accounting standards is
inadequate, but it is currently under re-organization. There have been a few instances
where companies have been suspended from the Nigerian Stock Exchange for Nigeria
(ROSC, 2004).
2.2

CONCEPT OF FINANCIAL STATEMENT

Firms are inclined to disclose accounting information in order to assure the market
participants that their accounting policies are consistent with the accounting
regulation and meet the information needs of their stakeholders. Findings show that
the disclosure of sensitive accounting information has not adversely affected firms'
profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit
higher profitability. The implementation of international financial reporting standards
enhances the quality and the comparability of financial statements; hence it promotes
consistency and reliability in financial reporting and facilitates companies in raising
capital internationally (Iatridis, 2008).

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Accountants are responsible for preparation of accounts and financial statements.

Accountants bring knowledge and skills to bear in carrying out these acts. Although
there may not be anything ordinarily wrong with this, it meant that accountants the
world over used and applied varying accounting principles in treatment of accounting
transactions, as long as such principles were not contravening the Generally Accepted
Principles in Accounting (Oghuma and Iyoha, 2005). The procedures were not
standardized and the consequences, majorly, was that given the same company, at the
same point in time, but with different managements and different accounting
ideologies, two different set of accounts may be generated and both giving a true and
fair view.
In addition, some accounting issues require judgment. The judgment can be based on
individual skill, experience and the knowledge of the person passing the judgment.
These variables involve individual differences and may affect the judgment. Different
accountants, therefore, can produce different balance sheets for identical companies
with similar characters and in the same industry (Oghuma and Iyoha, 2005).
In addition to this, the accounting profession needed more in terms of proper record
keeping, transparency, compatibility and enhanced public confidence, in financial
reporting. Arising from the above, standards were developed as a guiding tool, which
defines how companies should display transactions and events in their financial
statements. This is to ensure the needed uniformity of practice, enlightenment of users
of financial reports, and provision of a framework for preparation, presentation and
interpretation of financial statement (Kantudu, 2005) and (Oghuma and Iyoha,
2005). These fundamentally, should be in the best interest of the owners.

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2.3

COMPONENT OF FINANCIAL STATEMENT

Financial reports of organizations, according to verrechia (1990), comprise of the
following:

a)

Financial Statements:
These comprise external reports of a general nature that relate to the organizations
financial position. Annual Accounts are the most obvious example, but other reports
might include the organizations budget and periodic reports on financial
performance. The Companies and Allied Matters Act No. 1 of 1990, in Section 334,
stipulates the following as components of financial statements: Balance Sheet, Profit
and Loss Account, Notes to the Accounts, Value Added Statement, Cash Flow
Statement, Statement of Accounting Policies, Auditors Report, Directors Report,
and Group Financial Accounts.

b)

Special-Purpose Financial Reports:

These include financial reports that are required by regulators, tax authorities and
others, where the requisite information and format are specified by an external
authorized body.

c)

Internal Financial Reports:

These are formal reports that are produced for decision-makers within the
organization. Examples include policy papers with financial information, budgets and
budget-monitoring reports, and project appraisals. Informal reports generated by
managers themselves for daily control and similar purposes are not included in this
definition, as it is neither practicable nor sensible for the finance director to have
responsibility for any of these. However, the quality of the underlying finance systems
used for generating such reports remains the responsibility of the director of finance.

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2.4

USERS OF FINANCIAL STATEMENT

The users of financial statements use financial statements for a large variety of
business purposes and their ability to understand and analyze financial statements
helps them to succeed in the business world.
The various users of financial statements are classified and detailed as follows:
1. Internal Users
The internal users of financial statements are individuals who have direct bearing with
the organization. They may include:
i.

Managers and Owners: For the smooth operation of the organization, the
managers and owners need the financial reports essential to make business
decisions. So as to provide a more comprehensive view of the financial
position of an organization, financial analysis is performed with the
information supplied in the financial statements. The financial statement is
used to formulate contractual terms between the company and other
organizations.
A variable of the financial statement like the current debt to equity ratio is
important in deciding the amount of long term capital that would be required
to be raised. The financial statements of other companies can also provide
investment solutions to different companies. Sometimes it becomes difficult to
decide the right field in which financial resources may be channelized. In such
situations the financial statements of other companies provide the appropriate
guideline.

ii.

Employees: The financial reports or the financial statements are of immense

use to the employees of the company for making collective bargaining

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agreements. Such statements are used for discussing matters of promotion,

rankings and salary hike.
2.

External Users
The external users comprise of:
a.

Institutional Investors: The external users of financial statements are basically

the investors who use the financial statements to assess the financial strength
of a company. This would help them to make logical investment decisions.

b.

Financial Institutions: The users of financial statements are also the different
financial institutions like banks and other lending institutions who decide
whether to help the company with working capital or to issue debt security to
it.

c.

Government: The financial statements of different companies are also used by

the government to analyze whether the tax paid by them is accurate and is in
line with their financial strength.

d.

Vendors: The vendors who extend credit to a business require financial

statements to assess the creditworthiness of the business.

e.

General Mass and Media: The common people as well as media also make
part of the users of financial statements.

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2.5

STATUTORY REQUIREMENT OF FINANCIAL STATEMENT

The provisions of the NASB Act, 2003 were grossly inadequate to meet the
developments thereof. Accordingly, on June 3, 2011, Mr. President, Dr. Goodluck
Ebele Jonathan, GCON, GCFR, enacted the Financial Reporting Council of Nigeria
Act, No. 6, 2011 and therein repealed the Nigerian Accounting Standards Board Act
No. 22, 2003 (www.financialreportingcouncil.gov.ng/about/aboutnasb).
It is believed that it will be in the best interest of the nation to adopt IFRS. A phased
transition over a period of THREE YEARS is recommended. This is anchored on the
understanding that the nation will follow the milestones and timelines as enunciated
above and explained hereunder. It is pertinent to state here that the transition within
this earliest possible period of effective and meaningful adoption may be derailed if
any of the milestones and timelines is ignored (FRC 2010).
Some reporting entities are already using IFRS for non-statutory purposes. Such
IFRS-based financial statements must be in addition to the financial statements
prepared under relevant Statements of Accounting Standards issued to date by the
NASB.
The few entities that are already using IFRS for non-statutory purposes should be
allowed to continue as it will facilitate effective mandatory IFRS at the appropriate
time. The use of IFRS by entities prior to national enforcement is referred herein as
voluntary.
Where certain regulators require the preparation of IFRS-based financial statements,
such financial statements should be in addition to the ones prepared under national
GAAP as defined by the NASB.

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January 1, 2012 was recommended as the date for adoption of IFRS for all listed
entities. The choice of January 1, 2012 was anchored on the need to effectively
transit to IFRS over a three year period. Any entity that starts preparation for
transiting would need to convert its closing balances at December 2010 to IFRSbased figures which then become the opening balances as at January 1, 2011 for
IFRS-based financial statements as at December 31, 2011. This provides opening
balances for January 1, 2012 which is the first IFRS full financial statements as at
December 31, 2012 (with 2011 as comparative year). Within these years, all the
required changes in business process, Information Technology, contractual
obligations, etc necessary for effective IFRS-based financial statements must have
been fully effected to give true, fair and complete IFRS-based financial statements.
Mandatory reporting for all publicly listed entities and significant public interest
entities shall be December 31, 2012. This means that all listed companies and
significant public interest entities in Nigeria will statutorily be required to issue IFRS
based financial statements for the year ended December 31, 2012. The
commencement for preparation towards transiting to IFRS by SMEs is January 1,
2012. All other public interest entities are expected to mandatorily adopt IFRS, for
statutory purposes, by January 1, 2013. This means that all other public interest
entities in Nigeria will statutorily be required to issue IFRS based financial
statements for the year ended December 31, 2013(NASB 2010).

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2.6

REGULATORY FRAMEWORK FOR COMPLIANCE

1)

The accounts, financial reports or annual returns and other documents required under
the following Acts, or the amendments thereafter, shall be adopted for that purpose
by the Council
(a) Banks and other Banking Institutions (Amendment) Act Cap. B3 LFN, 2004 ;
(b) Companies and Allied Matters Act Cap. C20 LFN, 2004 ;
(c) Investments and Securities Act Cap. 124 LFN, 2004 ;
(d) Nigerian Investment Promotion Commission Act Cap. N117, 2004 ;
(e) Insurance Act Cap. 117 LFN, 2004 ;
(f ) Pensions Reform Act No 2, 2004 ; and
(g) Federal Mortgage Bank of Nigeria Act, Cap. F16 LFN, 2004 (NASB 2010).

(2)

Where there is any conflict between the financial reports or annual returns and other
documents required or prepared in fulfillment of the relevant Sections of the Acts
listed in sub-section (1) of Financial Reporting Council of Nigeria Act, 2011 and
other Acts which deal with financial reporting, the standards and guidelines adopted
for that purpose by the Council shall to the extent of that inconsistency, prevail.
In the recent past, the Nigerian government introduced major reforms aimed at
promoting confidence in corporate reporting and governance. A major omission
however was that the company law in Nigeria was not reviewed in the light of these
developments. The company law in Nigeria is predicated on the fact that Nigeria is a
"standard setter," creating its own financial reporting standards, and not a "standard
taker," accepting standards created elsewhere. There is also the concern that financial

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reporting standards should remain relevant for the public sector and not-for-profit
entities. (FRC 2010)
The Financial Reporting Council Bill was signed into law on 20 July 2011. According
to Olusegun Aganga, minister of Trade and Investment, "More meaningful and
decision enhancing information can now be arrived at from financial statements
issued in Nigeria because accounting, actuarial, valuation and auditing standards, used
in the preparation of these statements, shall be issued and regulated by this Financial
Reporting Council. The FRC is a unified independent regulatory body for accounting,
auditing, actuarial, valuation and corporate governance. As such, compliance
monitoring in these areas will hence be addressed from the platform of
professionalism and legislation".
January 1, 2012 is recommended as the date for adoption of IFRS for all listed entities
in Nigeria. The choice of January 1, 2012 is anchored on the need to effectively
transit to IFRS over a three year period. Any entity that starts preparation for
transiting would need to convert its closing balances at December 2010 to IFRS-based
figures which then become the opening balances as at January 1, 2011 for IFRS-based
financial statements as at December 31, 2011. This provides opening balances for
January 1, 2012 which is the first IFRS full financial statements as at December 31,
2012 (with 2011 as comparative year). Within these years, all the required changes in
business process, Information Technology, contractual obligations, etc necessary for
effective IFRS-based financial statements must have been fully effected to give true,
fair and complete IFRS-based financial statements.
Mandatory reporting for all publicly listed entities and significant public interest
entities shall be December 31, 2012. This means that all listed companies and

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significant public interest entities in Nigeria will statutorily be required to issue IFRS
based financial statements for the year ended December 31, 2012.
The commencement for preparation towards transiting to IFRS by SMEs is January 1,
2012. All other public interest entities are expected to mandatorily adopt IFRS, for
statutory purposes, by January 1, 2013. This means that all other public interest
entities in Nigeria will statutorily be required to issue IFRS based financial statements
for the year ended December 31, 2013.
IFRS for SMEs shall mandatorily be adopted as at January 1, 2014. This means that
all Small and Medium-sized Entities in Nigeria will statutorily be required to issue
IFRS based financial statements for the year ended December 31, 2014.
Entities that do not meet the IFRS for SMEs criteria shall report using Small and
Medium-sized Entities Guidelines on Accounting (SMEGA) Level 3 issued by the
United Nations Conference on Trade and Development (UNCTAD) (FRC, 2010) .
2.7

REGULATORY INSTITUTIONS FOR COMPLIANCE

Nigerias regulatory and supervisory framework is composed of the Central Bank of
Nigeria (CBN), the Ministry of Finance, the Nigerian Deposit Insurance Corporation
(NDIC), the Securities and Exchange Commission (SEC), National Insurance
Commission (NAICOM), and the National Board for Community Banks (NBCB).
There is also a Financial Services Regulation Coordinating Committee (FSRCC),
charged with coordinating the activities of these regulatory institutions.
i)

Central Bank of Nigeria (CBN). Established in 1958, the CBN is the apex
regulatory authority for the Nigerian financial system. It is also in charge of
the formulation and implementation of monetary policy., CBNs main

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responsibilities include: i) promoting monetary stability and a sound financial

system; ii) acting as banker and financial advisor to
the Government; and iii) acting as banker and lender of last resort to
commercial and merchant banks. CBNs regulatory and supervisory
responsibilities were enlarged and strengthened in 1997 through the Banks and
Other Banking Institutions Decree (BOFID), which extended CBN authority
beyond the banks to include finance companies, all development banks, the
Federal Mortgage Bank of Nigeria, community banks, and primary mortgage
institutions (PMIs). In 1999, the CBN was granted legal autonomy in the
exercise of its regulatory and monetary policy functions.
ii)

The Ministry of Finance (MOF).

The MOF cooperates with the CBN on monetary matters. Since 1997, the
MOF has chaired the Financial Services Regulation, Coordinating Committee
(FSCC).

iii)

Nigeria Deposit Insurance Corporation (NDIC).

The NDIC, patterned after the USA FDIC, complements the regulatory and
supervisory functions of the CBN. NDIC was established in 1988 to provide
deposit insurance in order to boost confidence in the banking system. Licensed
banks are mandated to pay 15/16 of 1 percent of their total deposit liabilities
annually as deposit insurance premium to the NDIC. Deposit Guarantee is the
sole responsibility of the Nigeria Deposit Insurance Corporation (NDIC). The
Corporation guarantees payment to depositors of all participating institutions
up to a maximum limit in accordance with its statute in the event of failure so
as to engender confidence in the nations banking system. The Corporation
currently provides deposit insurance coverage to the twenty-four (24) banks

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and 882 Micro-Finance banks (MFBs) and 101 Primary Mortgage Institutions
(PMIs). The limit currently stands at N500,000 per depositor of Deposit
Money Banks (DMBs) and N200,000 per depositor for MFBs and PMIS. The
N500,000 coverage level for DMbs fully covers about 90% of depositors and
about 30% of the volume of deposits in the banks. Similarly, the N200,000
coverage for MFBs fully covers about 99% of the depositors and about 51% of
the volume of deposits in that banking sub-sector.
iv)

Securities and Exchange Commission (SEC).

Established in 1979, the SEC is the regulatory authority for the capital market.
SECs major objective is the promotion of an orderly and active capital market
to ensure adequate protection of the investing public.
The SEC maintains proper standards of conduct and professionalism in the
securities business and surveillance over the market to enhance efficiency.
Further to the 1990 Companies and Allied Matters Decree, the SEC was
empowered to approve and regulate mergers and acquisitions and authorize
the establishment of unit trusts. In addition, the Investment and Securities
Decree of 1999 has invested the SEC with the additional responsibility of
directly promoting and developing the capital market in Nigeria.

v)

National Insurance Commission (NAICOM).

Established in 1997, NAICOM is charged with the regulation and supervision
of the insurance industry. Its purview includes: i) establishment of standards
for the conduct of insurance business; ii) ensuring that insurance companies
maintain adequate capitalization and reserves; iii) ensuring good management
of insurance companies; and iv) protection of insurance policy holders.

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vi)

National Board for Community Banks (NBCB).

The National Board for Community Banks (NBCB) provides support
functions for establishing and operating community banks. Until recently, it
was also responsible for regulating, and supervising a large number of
community banks. The NBCB provides provisional licenses to community
banks, while final licenses are to be granted by the CBN, which since 1997 has
taken responsibility for community bank supervision.

vii)

The Financial Services Regulation Coordination Committee (FSRCC).

The FSRCC was established to coordinate the supervision of all Banking
Institutions. It is chaired by the Governor of the CBN with the following
members: i) Director General, Securities and Exchange Commission; ii)
Commissioner for Insurance; iii) Registrar-General, Corporate Affairs
Commission; and iv) a representative of the Ministry of Finance not below the
rank of Director (EMSPD, 2000)

2.7.1

THE COMPANIES AND ALLIED MATTERS ACT 1990

The Companies and Allied Matters Act 1990 prescribes some formats and
contents of company financial statements, disclosure requirements and
auditing. It also requires that financial statements comply with the Statement
of Accounting Standards (SAS) issued, from time to time, by the Nigerian
Accounting Standards Board (NASB); and that the audit be carried out in
accordance with generally accepted auditing standards.

2.7.2

THE NIGERIAN ACCOUNTING STANDARDS BOARD ACT 2003

The NASB Act No. 22 of 2003 formally created the Nigerian Accounting
Standards Board and also established for it an Inspectorate Unit.

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2.7.3

COMPLIANCE AND MONITORING REGIME

One of the critical elements in the implementation of IFRS is the rigorous
enforcement of standards. The full benefits of a global set of financial
reporting standards such as IFRS will be realized only when these standards
are consistently enforced. IFRS is only one element of the financial reporting
structure. Other elements include auditing, actuarial, valuation, corporate
governance, etc. The institutions whose mandates allow them to ensure
compliance with IFRS now aim to protect both domestic and international
investors because of the growing globalization of financial markets.
In some countries the responsibility of enforcing IFRS rests with a number of
organizations. Institutions such as securities and exchange commissions,
banking and insurance supervisory authorities, stock exchanges and capital
market authorities currently play varying roles in enforcing financial reporting
requirements like IFRS. These countries are now considering unifying the
enforcement of financial reporting under one umbrella body so that other
organizations with professional interest in financial reporting can focus on
their core mandates. (NASB, 2010:17).
In Nigeria, the enforcement of IFRS is vested in one body, Financial
Reporting Council for Nigeria.

2.7.4

SOME RELEVANT LAWS AND REGULATIONS

a)

Nigerian Stock Exchanges Act 1961;

b)

Companies and Allied Matters Act, 1990;

c)

Nigeria Deposit Insurance Corporation Act 2006;

d)

Banks and Other Banking Institutions Act 1991;

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e)

Investments and Securities Act of 2007;

f)

National Insurance Commission Act 1997;

g)

Insurance Act 2003;

h)

Companies Income Tax Act 2004 (as amended);

i)

Petroleum Profit Tax Act 2004;

j)

Pension Reform Act 2004; and

k)

Federal Inland Revenue Service (Establishment) Act 2007, etc.

These laws and regulations have one provision or the other on financial
reporting. This calls for the amendment of these laws to ensure
uniformity and remove conflicts and ambiguity. The Financial
Reporting Council Bill will bring all financial reporting regulations
under one umbrella.

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CHAPTER THREE
RESEARCH METHODOLOGY
3.1

INTRODUCTION
One way by which knowledge can be acquired is through the scientific method. What
differentiates the scientific method from other methods are the assumptions and the
methodology. According to Frankfort - Nachmias and Nachmias (1996:13) a
scientific methodology is a system of explicit rules and procedures upon which
research is based and against which claims for knowledge are evaluated.

3.2

RESEARCH DESIGN
There are varieties of approaches employed to determine adequacy and to examine the
factors that influence the extent of information disclosure in the annual reports of
listed firms. This research interest is on the method whereby, the extent of sufficiency
is determined, firstly, by questionnaire analysis and secondly through content analysis
of annual financial reports using CAMEL Model.

3.3

SOURCES OF DATA
The data for this study was obtained from two main sources - primary and secondary
sources.

3.4

DATA COLLECTION METHOD USED

The Primary data were collected using a purposely-constructed questionnaire with
Yes and No sets of questions while the secondary data were gathered from the
annual reports of the First Bank of Nigeria being the case study in this research
symbolizing the whole Nigerian Banking Industry because it is the oldest and the
largest Bank in Nigeria.

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3.5

TECHNIQUE OF DATA ANALYSIS USED

The primary data collected from the questionnaire were analyzed, summarized and
interpreted according to the aid of inferential statistics and descriptive statistical
techniques such as simple percentages and Chi-square in order to determine the
sufficiency of financial statements from the stakeholders in the primary data to verify
whether the figures were by chance or statistically significant. Chi-square was used to
measure the discrepancies existing between the observed and the expected frequencies
and the research instrument used for the secondary data is the CAMEL Model which
is the recent innovation in the area of financial performance evaluation of banks.
Under this system is used in rating of individual banks is done along five key
parameters- Capital adequacy, Asset quality, Management capability, Earnings
capacity and Liquidity (yielding the rating systems acronym CAMEL). This model
will prove the level of significance in testing the stated hypothesis. This made it
possible for the researcher either to accept the null hypothesis or reject.

3.6

POPULATION AND SAMPLE SIZE

Seventy copies of the questionnaire were given to users of Financial Statements in
Abuja metropolis perceived as being knowledgeable by the researcher, and who were
ascertained to understand the basic issues in financial reporting out of which twentyfive were returned and completed. Academic qualification, the kind of work the
respondents do, together with their disciplines helped to determine knowledge
ability. The secondary data were gathered from the annual reports of First Bank of
Nigeria for the year end 2009 2011 being the oldest bank among other 15 listed
Banking Institutions in Nigeria.

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3.7

JUSTIFICATION OF DATA COLLECTION METHOD & DATA ANALYSIS

TECHNIQUE USED.
The Banking Institutions data were chosen for the analysis of this research work due
to the significant loan losses and bank failures since 1980 and up till now. Also, the

Nigerian public mainly invests in banks shares with the expectation of better
management and profitable performance. Lastly, investigating banks activities is of
great worth during this momentum of consolidation in the Banking Industry.
The questionnaire for this research was distributed to preparers and users of financial
statement of banks who are knowledgeable in financial reporting and analysis.
Knowledge ability is determined by asking the respondent whether he or she is
knowledgeable enough to interpret financial statement information for economic
decision making purposes. The Secondary data were the financial reports of First
Bank of Nigeria the oldest bank in Nigeria, founded in 1894. With over a century of
operation in Nigeria and a subsidiary in the United Kingdom, It also maintains the top
position in the Nigerian banking industry. According to the analysis carried out by
Global Credit Rating Co. (GCR 2010) First Bank is the largest bank in Nigeria based
on total assets, advances, deposits, and ranks the second largest based on tier 1 capital.

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CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1

INTRODUCTION
This chapter deals with the presentation and the analyses of primary and secondary
data. The primary data are presented using tables with statistical analysis methods
while the secondary data are analyzed using CAMEL Model which is the main
measure to evaluate the overall safety and soundness of a bank to aid easy

understanding. Firstly, it presents primary data obtained by the researcher through the
administration of questionnaire using frequency distribution and Chi-square.
Secondly, assessments were carried out using the variables obtained from the First
Bank Annual Report involving preliminary and advanced analyses of factor analysis.
4.2

DATA PRESENTATION & ANALYSIS

This study used two methods of data analysis. The first analysis is based on the
statistical table format using frequency distribution as obtained from a question in the
questionnaire and consequently converted into Chi-Square for easy analysis which
was presented in a tabular arrangement. Thereafter the second analysis tested the
hypothesis using the variables inferred from the financial statements of a particular
bank (First Bank) by CAMEL Model, rating the bank along five key parametersCapital adequacy, Asset quality, Management capability, Earnings capacity and
Liquidity (yielding the rating systems acronym CAMEL).
In all, seventy (70) questionnaires were administered of which twenty-five (25) were
returned. The twenty-five filled questionnaires formed the basis for the analysis
below.

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OBJECTIVE: Adequacy of Banks Annual Reports

Table 1
Variables

Frequency distribution

Percentage (%)

Yes

32

No

17

68

Total

25

100

Source: Field study (2012)

From the table, 25 respondents filled the questionnaires on the adequacy of the
financial statements of Nigerian banks.
Out of the 25 respondents 17 representing 68% did not agree with the question while
32% responded positively. From the above survey it is obvious that the annual reports
so far presented in the Nigerian banks are inadequate.
The 17 respondents who disagreed that the financial statements are far from being
adequate in Nigerian banks also indicated in their reactions to question 14 of the
questionnaire that the size, age and the profit stated in banks annual reports cannot
determine their inadequacies. This result thus, guided the researcher to the test of
hypothesis.

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4.3

TEST OF HYPOTHESIS
The hypothesis to be tested in this study is:
Ho:

There is no significant relationship between company size, company age and

the profits presented in the annual reports and the companys financial
statement adequacy.

Table 2
Respondent Type

Responses (observed)

Total

Yes

No

Accountants

Employees

Shareholders

Stockbrokers

Total

17

25

Source: Field study (2012)

Table 3: Computed values of the Chi-square statistic
O

OE

(O E)2

(O E)2/E

3.4

-0.4

0.16

0.047

4.76

0.24

0.0576

0.012

4.76

1.24

1.5376

0.323

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4.08

-1.08

1.1664

0.286

1.6

0.4

0.16

0.1

2.24

-0.24

0.0576

0.026

2.24

-1.24

1.5376

0.686

1.92

1.08

1.1664

0.608

25

25

2.088

Source: Computations of table 3

From the X2 table, the critical value at 0.05 significant level where the degree of freedom = 3
is 7.82. Our computed value, as given in table 2 above is 2.088. It is therefore seen that the
computed value is lower than the critical value.
Decision: Accept the Null hypothesis and understand that there is no significant relationship
between company size, company age and the profitability presented and the financial
statement adequacy.
The Chi-square test value is within the non significant section and it therefore symbolizes that
the company size, company age and the profitability presented in the financial statements
cannot be used as the criteria for its financial statements adequacy.

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Table 4: CAMEL testing of the hypothesis using the First Bank of Nigeria Financial
Statements
RATIO

BENCH

RESULT

CAPABILITY

MARK
CAPITAL ADEQUACY RATIO

2011

2010

2009

CAR

> 8%

20.5%

20.35% 15.80%

ADEQUATE

EQUITY CAPITAL TO TOTAL ASSETS

> 4 - 6%

12.87% 17.78% 14.32%

ADEQUATE

NPLs TO TOTAL LOAN

< 1%

2.64%

7.57%

INADEQUATE

NPLs TO TOTAL EQUITY

< 1%

9.20%

27.18% 30.20%

INADEQUATE

ALLOWANCE FOR LOAN LOSS RATIO

> 1.5%

0.35%

1.96%

0.52%

INADEQUATE

PROVISION FOR LOAN LOSS RATIO

> 100%

2.4%

0.53%

0.62%

INADEQUATE

> 10-15%

27.5%

0.05%

0.02%

INADEQUATE

NET INTEREST INCOME MARGIN (NIM)

> 4.5%

6.46%

13.0%

0.73%

ADEQUATE

COST TO INCOME RATIO

< 70%

56.8%

65.5%

59.2%

ADEQUATE

RETURN ON ASSET (ROA)

> 1%

1.8%

1.49%

0.23%

ADEQUATE

RETURN ON EQUITY (ROE)

> 15%

13%

7.90%

0.41%

INADEQUATE

ASSET QUALITY RATIO

8.23%

MANAGEMENT QUALITY
EARNING GROWTH RATE
EARNING ABILITY RATIO

LIQUIDITY RATIO

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CUSTOMER DEPOSITS TO TOTAL

> 75%

68.60% 62.92% 61.93%

INADEQUATE

< 80%

63.44% 78.83% 80.08%

ADEQUATE

ASSETS
TOTAL LOAN TO CUSTOMER
DEPOSITS

Source: First Bank of Nigeria Annual reports

4.4

DISCUSSION OF FINDINGS
From the observations of the selected banks financial statements analyzed above and
other responses from the questionnaire, our findings are stated and discussed as
follows:
Although the banking sector in Nigeria has maintained a high standard of information
disclosure which could be attributed to the reform, regulation and competition;
massive financial reporting scandals resulting from manipulation of financial
statement numbers with the active collusion of auditors in a manner that clearly
vitiates the notion of the independent auditor. Confidence in publicly available
financial information has been weakened globally (Sulton 2002).
Utilizing CAMEL rating that is proven to be an effective internal supervisory tool for
evaluating the soundness of a financial firm, the analysis on the banks and most
especially the contents evaluation executed on First bank of Nigeria indicates that the
bank financial analysis is inadequate viewing the result obtained from CAMEL the
Capital Adequacy Ratio (CAR) which maintain balance with the risks exposure of the
financial institution such as credit risk, market risk and operational risk, in order to absorb
the potential losses and protect the financial institutions debt holder is found to be
adequate whereas

all the other

factors in CAMEL expressed one level of

insufficiency or the other in the banks financial statements i.e. Asset Quality Ratio,

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Management Quality, Earning Ability Ratio and Liquidity Ratio. Thus, this
observation revealed that the Nigerian Banking Industry necessitates an improved
development that complies with the advanced standard.
The primary data further revealed that:
a.

The shareholders are after their own returns on investments in the company, and
not how the management of the company settles its obligation to creditors and
lenders while some of these shareholders complained of unobtainable annual
reports and controlled notices of meetings.

b.

The extent by which information content of financial statement affects

shareholders investment decision is low; implying that there are other factors
that have stronger effect on the investment decision of shareholders.

c.

The employees criticized the manipulation of banks financial statements,

articulating that such actions have negative effects on the confidence of the
shareholders i.e. deliberate, consistent understatement of net assets and profits.

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CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECO MMENDATIONS
5.1

SUMMARY
Financial Statements are documents that individuals, organizations and governments
rely upon for the assessment of the position of their enterprises.
Financial Statements are a pre-requisite for Financial Reporting which is the whole
process of reporting the financial activities of the firm to the external and internal
Stakeholders.
Financial Statement of companies consist, a balance sheet, Profit and Loss Account,
Notes on the accounts, Auditors reports, Directors report and in the case of holding
Company, the group financial statements.
Indigenous companies in Nigeria participate minimally in the Nigerian government
activities and they also lack resources facilitating investment attitude, thus they are
inconsistent in financial reporting.
The Securities and Exchange Commission has for many years been developing
advanced accounting standard in order to prevent the cost of processing jurisdictional
accounting requirements.

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The study clearly investigates the position of companies in presenting annual financial
statement according to the standardized adequacy and the stated problem of the study
is on the low quality of Foreign Direct Investment in Nigeria.
Researches on the extent of financial reporting in Nigeria had been done by various
researchers with international accolade but these studies had drawbacks. It is against
this backdrop that this research plan to discover if Nigerian financial statements are
deficient?
Survey and content approaches were adopted in executing the objectives;
questionnaires were distributed and the content analysis was carried out using the
annual reports of First Bank of Nigeria between 2009 and 2011.
The report presented by the World Bank and IMF Board illustrated that there have
been lapses on the part of authorities who have the compliance responsibilities of
financial reporting in Nigeria i.e. the Registrar of Corporate Affairs Commission.
Statutory Requirement of financial statement in Nigeria has now been revolutionized,
in that the Financial Reporting Council of Nigeria Act No. 6, 2011 repealed the
Nigerian Accounting Standard Board Act No. 22, 2003.
The Regulatory Framework consists i) Banks and other Banking Institution ii)
Companies and Allied Matters Act iii) Investments and Securities Act iv) Nigerian
Investment Promotion Commission Act

v) Insurance Act vi) Pensions Reform vii)

Federal Mortgage Bank of Nigeria.

The Regulatory Institution for Compliance are: a) Central Bank of Nigeria b) The
Ministry of Finance c) Securities and Exchange Commission d) National Insurance

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Commission e) National Board for Community Banks f) The Financial Services

Regulation Coordination Committee.
This research applied inferential and descriptive statistical techniques by using Chi
Square; also the CAMEL Rating Model for banks annual reports assessment with the
sample size of twenty-five questionnaires.
As established in the main body of the research, the major financial statements used
by Nigerian corporations are very similar to those used by their American
counterparts. The Income Statement, Balance Sheet, Statement of Cash, Retained
Earnings, Stockholders Equity, and Statement of Changes in Stockholders Equity
although the strengths and weaknesses of the accounting and auditing environment
influence the quality of corporate financial reporting; thereby disclosing the lapses on
the part of authorities who have the compliance responsibilities of financial reporting
in Nigeria.
The issue therefore, is not mainly on the adoption of financial reporting standard IFRS
by the Financial Reporting Council of Nigeria to publicly quoted companies and
banks in Nigeria but also on the control and supervisory prevalence of adequate
financial reporting by monitoring the presentation and investigating countrys
financial and non financial organisations by using advanced standards.
5.2

CONCLUSION
The objective of this study was threefold: (i) to identify the evident of financial
reporting deficiency in the Nigerian Banking Industry;
(ii)

to analyze the financial adequacy of the sampled bank;

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(iii)

to determine the effective mechanisms to monitor and suggest measures to

improve financial reporting in Nigeria.

In respect to the first objective, results lead to the conclusion that Nigerian Banking
Industrys financial statements have low level of adequacy. The results provide
support for the argument that companies financial statements are inadequate.
Although the Capital Adequacy Ratio and the Earning Ability are quiet high in that
Capital Adequacy Ratio is averaged of 18.88% with > 8% criterion. However, Asset
Quality, Return on Equity and Liquidity Ratio i.e. Customer Deposits to Total Assets
are inadequate.
Although the reported results are based on a sample of Banking Sector the results can
be generalized to all other NSE listed companies and the wider population of all
public companies in Nigeria.
This study concludes on:
i.)

There are inadequacies of financial statements in Nigeria which is rated high

according the International benchmark i.e. CAMEL model standard.

ii.)

The improvements presently are marginal and mostly insignificant.

iii.)

Inadequate and unsatisfactory financial statements resulted in manipulated

profitability and asset position.

5.3

RECOMMENDATIONS
Based on the conclusions above, the researcher recommends that:
1. Strict compliance with prescribed accounting information disclosure requirements
This could be achieved if the relevant regulatory agencies effectively pursue the
disclosure requirements recognized by laws, while making sure that corporate entities

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who default are made to face the due penalties, thus protecting innocent investors
from undue heartaches.
2. Uniformity and reliability in Financial Reporting
In most of the financial reports most expression are misstated and manipulated from
actual realization, we hereby suggest that relevant regulatory agencies hold managers
of corporate bodies responsible for any significant variance between presented and
actual performance of entities concerned.
3. Ensuring adequate financial reporting of relevant accounting information.
Financial reporting of a long list of irrelevant accounting information is synonymous
to outright inadequacy; all those concerned with setting standards are enjoined to
ensure proper standards and accurate financial statements all the Nigerian firms.

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