THE IMPACT OF INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARD (IPSAS) IN NIGERIA PUBLIC SERVICE
(A CASE STUDY OF LAGOS STATE CIVIL SERVICE)
CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual framework of IPSAS
The development of the IPSAS has its origin in the accounting progression as a way to improve the transparency and accountability of governments and their agencies by improving and standardizing financial reporting. The IPSAS Board (IPSASB) is an independent standard setting board supported by the International Federation of Accountants (IFAC). The IPSASB issues IPSAS, guidance and other resources for use by the public sector around the world.
The IPSASB (and its predecessor, the IFAC public sector committee) has been developing and issuing accounting standards for the public sector since 1997. As transactions are generally common across both the private and public sector, there has been an attempt to have IPSAS converged with the equivalent International Financial Reporting Standards (IFRS).
The IPSAS are also developed for financial reporting issues that are either not addressed by adopting an IFRS or for which no IFRS has been developed. The IPSASB started out with the conceptual framework of the International Accounting Standards Boards (IASB) and is in the process of developing its own conceptual framework to meet the financial reporting needs of entities in the public sector.
The public sector, for the purpose of IPSAS, refers to national government, regional governments (e.g state, provincial and territorial), local government (e.g town and city), and related government entities (e.g agencies, boards, commissions and enterprises). The IPSAS applied in the preparation of general purpose financial reports that are intended to meet the needs of users who cannot otherwise command reports to meet their specific information needs. IPSAS are aimed for application to the general purpose financial reporting of all public sector entities other than Government Business Enterprises (GBEs). GBEs are expected to apply IFRS.
2.2 Countries that have adopted IPSAS
The increasing demand of high quality global financial reporting standards of public entities brought to the fore the craze for adoption of IPSAS by both the developing and developed countries. According to [8], the countries that have adopted IPSAS are grouped as follows:
2.2.1 Countries that have fully adopted and implemented IPSAS
Abu Dhabi, Albania, Australia, Azerbaijan, Bangladesh, Brazil, Canada, Cayman Islands, Cyprus, Costa Rica, East Timor, Fiji, France, Georgia, Japan, Kazakhstan, Kyrgyzstan, Latvia, Liberia, Lithuania, Malaysia, New Zealand, Nicaragua, Pakistan, Palestine, Philippines, Romania, Russia, Singapore, Slovak Republic,
2.3 IPSAS adoption towards transparency and accountability
The global trends of event have informed both the private and public sectors on the need to address matters that bother on Transparency and Accountability. Without doubt transparency and accountability is all about being responsible to those who have invested their trust, confidence and resources to one in assigned position or office. According to Adegite, defined Accountability as the obligation to demonstrate that work has been conducted in accordance with agreed rules and standards and the officers reports fairly and accurately on performance results vis-à-vis mandated roles and plans.
Public accountability is an essential component for the functioning of our political system. Public accountability as the basic tenet of democracy.
Similarly, the principle of transparency relates to the openness of government to its citizens. Good governance includes appropriate disclosure of key information to stakeholders so that they have the necessary facts about the government’s performance and operations. Accordingly, the government’s decisions, actions and transactions are conducted in the open. In relating IPSAS adoption on Transparency and accountability, the UNAIDs programme committee board (2013) reported that IPSAS adoption will improve transparency and accountability of the financial report IPSAS are standards of high quality which serve as catalyst for providing sound and transparent financial statements thereby improving operational performance, accountability and fair allocation of resources
IPSAS standards to improve transparency and accountability in government entity’s financial report. The development of the IPSAS has its origins in the accounting profession as a way to enhance the transparency and accountability of governments and their agencies by improving and standardizing financial reporting. Finally, concluded that there are no doubts that applying universal high quality standards can promote efficiency, transparency which in long-run may promote public accountability.
2.4 IPSAS adoption towards corruption reduction
Over the years, citizens of some developing countries have been blaming and accusing their leaders of mismanagement and diversion of public resources for their personal gains. While some members of the public describe the ugly menace as stealing, others term it corruption. It was in this direction that observed that adoption and proper implementation of IPSAS would create avenue for reduction in case of manipulation of financial resources in the public sector since one of the objectives of IPSASs is to engender transparency and accountability in the operation of public entities. It was also added that full and proper implementation of IPSAS pave way for Related Party Disclosure which by extension check cases of corruption through effective, efficient, and transparent financial reporting in the public sector.
Considering the fact that official corruption is a threat to government legitimacy and authority and reduces the amount of public money available to fund public services, adoption and implementation of IPSAS by the accounting profession are giant stLSTC in the global fight against government corruption. The value relevance of accounting information is determined by the ability of that information to influence its user‟s decision making. Barth, Beaver and Landsman (2001)outline six reasons why value relevance research is useful to financial accounting setters as thus: it provides an insight to the standard setters; it focuses on equity investment; empirical implementation; it accommodates conservatism; it carries information for valuing equities; and it allows the uses of econometric techniques. Holthausen and Watts (2001) outlined different type of value relevance researches as: relative association studies, incremental association studies and marginal informationcontent studies. Each of these studies carries a specific uses to the standard setters. This study is basedon relative association type of value relevance. This study investigates the how IPSASs associate with the shareprices.
Value relevant Research has different approaches. Francis and Schippers (1999) outline four approach of handling value relevance research, thus: fundamental analysis view, the predictive view, the information view and the measurement view. Fundamental view deals with fundamental analysis in accounting research with the expectation that the stock market is efficient. Prediction view also considers financial information as value relevant if it can predict variables. Information view on the other hand considers information to be value relevant if that information can be use in setting prices. Lastly measurement view considers financial information to value relevant if it can be able to capture information. This study adopts predictive approach of value relevance research. The assumption of fundamentalist is extreme; the efficient market is more of assumption than reality. It is a market where all the needed information is available andaccessible.
2.5 Review of EmpiricalStudies
Empirical literatures in respect of book value per share, earnings per share and intangible assets in relation to share prices are reviewed in this section.
2.5.1 Book Value per Share and Market shareprice
Bagudo, Abdulmanaf and Ishak (2015) examine the value relevance of mandatory adoption of IPSAS in the Nigerian financial industry using the data collected from 52 companies for the period 2010–2013. Ohlson (1995) model was used to proxy share price. The result revealed that the adoption of IPSAS improved the value relevance of accounting information in the Nigerian financial industry. The Book Value per Share (LAWMA) and Earnings per Share (LSTC) are higher under IPSAS than under SAS. This study stopped at 2013 and the findings of this study may not necessarily reflect the current economic reality.
Bolibok (2014) examines the impact of IPSAS on value relevance of accounting data using a sample generated from the listed banks on Warsaw stock exchange over the period of 1998- 2012. The analysis is based on Ohlson model (1995) and the findings revealed that there is an increase in the value relevance of both book value of equity and residual income of banks after the introduction of IPSAS. The study avoided the use of any normality test which may likely affect the validity and reliability of the statistical inferences derivable from themodel.
Barth, Landsman and Lang (2008) examine the effect of international accounting standards on accounting quality. The paper investigated whether application of IAS is associated with higher accounting quality using 1896 sample generated from 21 countries for the period 1990–2003. The study used OLS regression for data analysis. The findings revealed that firms that apply IAS are less earning management, more timely loss recognition, and more value relevance of accounting amounts than do matched sample firms that apply non-US domesticstandards.
Hung and Subramanyam (2007) examine the financial statement effects of adopting international accounting standards. The study compared the nancial statements of a sample of German companies that voluntarilyadopted the IAS reporting approach. They examined their accounting numbers of prior years‟ restated in the IASadoption year. The results indicated that bookvalues of equitybetween the two reporting systems are value relevant, but not for earnings. However, the study found no difference in value relevance of the book value of equity andearnings under IAS and German GAAP. The study is beneficial in such a way that it used the restated statement that allows directcomparison.
Chen, Chen and Su (2007) examine the effect of the comparability and relevance of financial reporting after adoption of IPSAS in Spain. The study used a sample size of all listed firms (financial and non-financial) issued A-share and AB-share in China under the period of 1991– 1998. The study used annual return, and market value as dependent variables and the independent variables are Earnings per share, change in earnings, previous year price, and book value of equity per share, net income per share, profitability, firm size, earnings persistence, and liquidity. The models used for data analysis are return model, and a price model. The findings revealed that accounting information has value relevance to investors. The study is unique in such a way that it utilizes the major two value relevance models of price andreturn.
2.6 Theoreticalframework
This section discuss and used two theoretical framework mostly used by the researchers in the area to explain the relationship between value relevance of accounting information and share so as to adopt the theory after a thorough explanation on how they capture all the variable of the study.
2.6.1 The Efficient Markets Hypothesis(EMH)
The efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. The model was developed independently by Fama andPaul (1960). This idea has been applied extensively to theoretical models and empirical studies of financial securities prices. The origins of the EMH can be traced back to the work of two individuals in the 1960s: Eugene F. Famaand Paul A. Samuelson. The model is on the view that, the more efficient the market, the more random the sequence of price changes generated by such a market, and the mostefficientmarketofallisoneinwhichpricechangesarecompletelyrandomand unpredictable. EMH literature revolves around the popular literature of LeRoy in 70th and that of Lucas in the 80th on the random walk hypothesis(RWH).
The model hypothesize and empirically tests that, market price of a share of common stockmust equal the present value of all future dividends, discounted at the appropriate cost of capital. The theory is on the notion that, the current stock price reflects all the available information about the value of the firm and given no chance for earning excess profit. Fama (1970) states that, the efficient market is in three forms; the weak, semi strong andstrong.
2.6.2 Residual Income Valuation Model
Value relevance researches are research that tried to show case the relationship between market information and accounting information. Therefore many studies (Tsalavoutas, (2009); Alfonso, Hutzen, Georgios and Sotiropoulos, (2011); etc) opine that the best theory that is underpinning value relevance research is Residual Income Valuation (RIV). The model is based on the assumption that value of the firm equity equals to the net present value of the expected dividend that will be distributed to equity holders. It's also based on the assumption that three basic statement supply accounting data, which are income statement, balance sheet and statement of changes of owner‟s equity. The theory reconciles income statement and balance sheet through clean surplus relation.
It is equally important to note that Residual Income Valuation is based on the notion that investors base security prices on the future earnings. The theory is derived from Modigliana and Miller, M&M concept of debt. The M&M is on the view that firm‟s borrowing activities, whether incremental or on average, yielding zero present value. Financing activities is separated fromoperatingactivitiestoensurethatfirmequityvalueequaltovalueofoperatingactivities plus value of financial assets (Feltham&Ohlson, 1995). Therefore, financial asset is assumed to be equal to book value. As a consequence, the analysis of the firm value and IPSAS as a function of accounting data depend on how these affect the prediction of future abnormal earning sequence.