Project – TRENDS IN EARNINGS QUALITY

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CHAPTER ONE

INTRODUCTION

1. Background to the Study

An important quality of financial information is what it must assist users to make meaning decision extant literature as well as accounting standard recognize that the principal objective of financial and accounting information is to aid decision making. In order to satisfy the criterion of decision usefulness accounting information must possess two broad categories of qualities these are;

1. User specific quantities and
2. Decision specific qualities

With respect to decision specific quantities accounting information must be relevant and reliable. When accounting information is free from error and biases and faithfully represent the fundamental realities of the organization. It is said to be reliable if it has the capacity to influence the decision making it is said to be relevant. The quality of accounting information available.

The two keys measure in accounting information are earning and book value.

Dechew & Schrand,2004 state  that Accounting information is the most sought after indicator by investors. This is so because it allow them to make decision as to the value of equity extent literature as documented the statistical association between equity value and key boltom line measure  of earning and book value (Ball & Brown (1968).

Empirical literature examining the association between firm value and earning document a weak relationship. A lot of factor has been adduced for it one factor however that has not been address is that of earning quality.

Earning quality can be defined as “Absence of earning management. This is so because where manager intentionally manipulate earning it reduce the quality of earning consequently tier usefulness as decision criterion. The incentive to engage in earning management is accentuated by many actors to include the quality of corporate governance, the legal environment opportunity available to manipulate earning etc. In the context of the foreign earning quality assume a critical dimension with respect of quality of investment decision.

1. Statement of Problem

A survey of corporate business in Nigeria specially in banking industry over the years will reveal several instance of distresses is depositor and investor is that of bank giving lean bill of health by auditory only for those banks become distress in no distant time. In 2010 the CBN declared 10 banks as critically ill. This was against the backdrop of fatalistic reported earnings by such banks by 2011 these banks reported several losses that wiped up their capital base. The implication of this was that profit hitherto reported where of dubious quality or doubtful quality.

The principal problem which this study address is the quality of earnings in quoted firms in the Nigeria stock exchange for the past 10 years.

1. Research Questions

In order to achieve the objective of the study the following questions are seeking for answer(s).

1. What is the quality of earning in Nigeria?
2. Do the quality of earning increase or decrease?
   1. Objectives of the Study

1.     To find out the quality earning in Nigeria.

2.     To find out if the earnings in Nigeria increase or decrease.

1. Statement of Hypothesis

In order to achieve the objective stated above, the following hypotheses are raised.

HO1: Earning quality has decline overtime in Nigeria.

Ho1: Earning quality has increase overtime in Nigeria.

Ho2: Earning quality is negatively related to market return and volatility.

Ho2: Earning quality is positively related to market return and volatility.

1. Significance of the Study

Earning quality is of interest to users of financial statement particularly investors. For the average Nigeria investor perhaps the only source of information available for investment decision making is accounting information. A key component of that is earning quality. This study is of interest to different categories of the public.

1. For the investor, it focuses on the importance of earning quality as part of decision making criterion.
2. For regular earning quality represent a measure of the potency and desirability for enforcement mechanism.
   1. Scope of the Study

This study covers a time period 2002 to 2010. A period in which the stock market witnessed dramatic changes it is a period that coincides with liberalization of the economy  and in which the market experience turbulence between 2006 and 2008 equity price climb high and by 2009 and 2010. The market nose-drive. Some have argued that the market exuberance in 2007 and 2008 had nothing to do with fundamentals such as earnings but rather with skyrocketing oil prices. The focus on quoted firms is informed by stringent reporting requirement relative to those unknown quoted firms. They are expected to have their financial statement audited and publicly available for investor.

1. Limitation of the Study

• Data collection: The study has limitation on the primary and secondary source of data. The primary data from questionnaires and interview were scanty because of errors in opinion of the respondents on the objectives of the secondary source of data collection. There were not enough literature on the study in the schools library.
• The secrecy of the organization was another major constrain is that the top management staff were not willing to dispose certain information that would have enable the researcher to make a proper conclusion.
• Language barrier was another factor in some of the junior staff of the company do not understand spoken English.

The retrieval of the administered questionnaire pose another challenges to the end that some of the management staff were not around as at the times the researcher came to collect the answered questionnaires. This inhibits a great problem that hindered the researcher to form a proper conclusion.

1. Definition of Terms

Earning quality simply mean the degree to which management’s choices of accounting estimate can affect imported income (thus choice occurs every period) some of such estimate may be difficult quantify given the company the lee way (opportunity) to report a wide range of periodic earnings.

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Project – TRENDS IN EARNINGS QUALITY