1.1   Background of the
Study

Globalization of capital
markets requires a unified global accounting, reporting and disclosure set of standards.
As a result of increasing volume of cross border capital flows and the growing
number of foreign direct investments via mergers and acquisitions in the
globalization era, the need for the harmonization of different practices in
accounting and the acceptance of worldwide standards has arisen. This worldwide
standard is International financial reporting standards (IFRS). Although, there
has been series of contentions as regarding the impact of this standard on the
quality of financial statements, but this study will provide a clear
understanding of their relationship.

International Financial
Reporting Standards (IFRS) is a set of principle –based issued and established
by International Accounting Standards Board (IASB) and generally accepted by
different countries around the world to ensure comparability and transparency
in accounting practice (Desoky and Mousa, 2014).The establishment of such
standards by IASB aimed at achieving harmonization and promotion of financial
practices to ensure consistency in reporting format across countries which
should minimize cost of processing financial information to investors and
improving efficiency of capital markets (Wen et al, 2011). Recently around the
world more than 120 countries and reporting jurisdictions required domestic
listed companies to prepare their financial statements in accordance with IFRS
(Mousa and Desoky, 2014). The adoption and implementation of IFRS has been one
of the most important events in accounting history of different countries around
the world which induce significant changes in the financial practices
(Kousenidis, et al, 2010). However, changes are found to vary among countries
and reported to be more serious in countries that had a code-law accounting
system (Ball et al., 2000). Before implementation of IFRS, existed accounting
system affected by severe government and legalistic influences which is in
contrast with a common-law accounting system countries like North America
(Kousenidis, et al, 2010). In a common law accounting system there is a proper
description of IFRS and accounting is mainly affected by the market
practitioners (Ball et al., 2000). With growing acceptance of IFRS by different
countries around the world, many researchers aimed to find out empirically
whether the new accounting standards has improved the quality of financial
statements that is reported to the users. Furthermore, banks’ ability to
engender economic growth and development depends on the health, soundness and
stability of the system. The need for a strong, reliable and viable banking
system is underscored by the fact that the industry is one of the few sectors
in which the shareholders’ fund is only a small proportion of the liabilities
of the enterprise. It is, therefore, not surprising that the banking industry
is one of the most regulated sectors in any economy. It is against this
background that the Central Bank of Nigeria, in the maiden address of its
current Governor, Prof. Charles Soludo, outlined the first phase of its banking
sector reforms designed to ensure a diversified, strong and reliable banking
industry. The primary objective of the reforms is to guarantee an efficient and
sound financial system. The reforms are designed to enable the banking system
develop the required resilience to support the economic development of the
nation by efficiently performing its functions as the fulcrum of financial
intermediation (Lemo, 2005). Thus, the reforms were to ensure the safety of
depositors’ money, position banks to play active developmental roles in the
Nigerian economy, and become major players in the sub-regional, regional and
global financial markets. The key elements of the 13-point reform programme
include: Minimum capital base of N25 billion with a deadline of 31st December,
2005; Consolidation of banking institutions through mergers and acquisitions;
Phased withdrawal of public sector funds from banks, beginning from July, 2004;
Adoption of a risk-focused and rule-based regulatory framework; Zero tolerance
for weak corporate governance, misconduct and lack of transparency.

On the other hand Earnings
management has been an issue of continuous concern for several years for
regulatory bodies and accounting practitioners. For example, Hadani, Goranova
and Khan (2011) argue that earnings management increases information asymmetry
and negatively impacts the quality of financial reports. Earnings management is
said to be the reasons for low quality of reported information. It is the
choice of a manager among accounting policies which allow achieving some
specific objectives (Scott, 2003). Managers use flexibilities within the
accounting standard to choose accounting methods, policies and estimates in
reporting process to reflect firm’s future prospect (Shehu,
2013).Thus the very nature of accounting accruals gives managers a great
deal of discretion in determining the earnings in any given period. Managers can
apply legal and permitted accounting methods or practices which inevitably
impacting negatively on earnings quality Presently, many countries have
replaced national accounting Standards by IFRS in order to make local
accounting system more transparent, reliable, relevant, understandable and more
importantly to enhance financial reporting quality. However, the process of
IFRS implementation varies significantly from country to country due to
political, cultural, economic, legal and institutional factors. Nigeria and
many developing countries are characterized by weak institutions and volatile
economic and political environment which are not very conducive for effective
implementation of IFRS (Tanko, 2012). It is to this regard that study examines the impact of IFRS
adoption and banking reform on earning management using first bank as the case
study.

1.2 STATEMENT OF THE PROBLEM