EXAMINATION ON THE EXTENT OF COMPLIANCE TO INTERNATIONAL FINANCIAL REPORTING STANDARD (A CASE STUDY OF WEMA BANK PLC)

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 INTRODUCTION

This chapter is on the review of related literature about International Financial Reporting Standards with focus on WEMA Bank of Nigeria Plc, Uyo, Akwa Ibom State.

The researcher presents the views and opinions of various authors as follows:

2.2 CONCEPTUAL FRAMEWORK

According to Barth et al. (2007:2), the IASB Framework was approved by the IASC Board in April 1989 for publication in July 1989, and adopted by the IASB in April 2001. In September 2010, as part of a bigger project to revise the Framework the IASB revised the objective of general purpose financial reporting and the qualitative characteristics of useful information. The remaining of the document from 1989 remains effective, Ashbaugh and Pincus (2001:422).

This Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users.

The Conceptual Framework deals with:

(a) The objective of financial reporting;

(b) The qualitative characteristics of useful financial information;

(c) The definition, recognition and measurement of the elements from which financial statements are constructed; and

(d) Concepts of capital and capital maintenance.

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investment, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. Many existing and potential investment, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed (Barth et al. 2007:6; Chen 2010:226).

General purpose financial reports do not and cannot provide all of the information that existing and potential investment, lenders and other creditors need. Therefore those users need to consider pertinent information from other sources. Other parties, such as regulators and members of the public other than investment, lenders and other creditors, may also find general purpose financial reports useful. However, those reports are not primarily directed to these other groups.

In order to meet their objectives, financial statements are prepared on the accrual basis of accounting. Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period, Daske et al. (2007:16).

The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future.

Qualitative characteristics identify the types of information that are likely to be most useful to the existing and potential investment, lenders and other creditors for making decisions about the reporting entity on the basis of information in its financial report (financial information). If financial information is to be useful, it must be relevant (i.e. must have predictive value and confirmatory value, based on the nature or magnitude, or both, of the item to which the information relates in the context of an individual entity’s financial report) and faithfully represents what it purports to represent (i.e. information must be complete, neutral and free from error). The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. The IASB acknowledges that cost may be a constrain on preparing useful financial information Paananen (2008:17). The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

(a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

(b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

(c) Equity is the residual interest in the assets of the entity after deducting all its liabilities.

The elements of income and expenses are defined as follows:

(a) Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

(b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence’s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

An item that meets the definition of an element should be recognized if:

(a) It is probable that any future economic benefit associated with the item will flow to or from the entity; and

(b) The item has a cost or value that can be measured with reliability.

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entities’ return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss.

The Board recognizes that in a limited number of cases there may be a conflict between the Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements of the IFRS prevail over those of the Conceptual Framework. As, however, the Board will be guided by the Conceptual Framework in the development of future IFRSs and in its review of existing IFRSs, the number of cases of conflict between the Conceptual Framework and IFRSs will diminish through time. The Conceptual Framework will be revised from time to time on the basis of the IASB’s experience of working with it, Chen et al. (2010).

2.3 THEORETICAL FRAMEWORK

Recently there has been a push towards the adoption of IFRS developed and issued by the International Accounting Standards Board (IASB). The increasing growth in international trade, cross border financial transactions and investments which unavoidably involves the preparation and presentation of accounting reports that is useful across various national borders, has brought about the adoption of IFRS by both the developed and developing countries (Armstrong et al., 2007).

The process of adoption received a significant boost in 2002 when the European Union adopted a regulation 1606/2002 requiring all public companies in the territory to convert to IFRSs beginning in 2005 (Iyoha and Faboyede, 2011). A number of African countries including Nigeria, Ghana, Sierra Leone, South Africa, Kenya, Zimbabwe and Tunisia among others have adopted or declared intentions to adopt the standards. In particular, Nigeria adoption of IFRS was launched in September, 2010 by the Honourable Minister, Federal Ministry of Commerce and Industry – Senator Jubriel Martins-Kuye (OFR) (Madawaki, 2012). The adoption was planned to commence with Public Listed Companies in 2012 and by end 2014 all stakeholders would have complied. As at today, banking sector has fully implemented. This is considered a welcome progress for developing countries especially some of those that had no resources to establish own standards.

There are proponents as well as opponents who have arguments for and against the global adoption of IFRS. According to Barth (2007), the adoption of a common body of international standards is expected to have the following benefits: lower the cost of financial information processing and auditing to capital market participants as users, familiarity with one common set of international accounting standards instead of various local accounting standards by Accountants and Auditors of financial reports, comparability and uniformity of financial statements among companies and countries making the work of investment analysts easy, attraction of foreign investment in addition to general capital market liberalization.

Ball (2006) stated that many developing countries where the quality of local governance institutions is low, the decision to adopt IFRS will be beneficial. Lipsey and Chrystal (2003) noted that FDI often generates somewhat higher-paying jobs than might otherwise be available to local citizens, it generates investment that may not be possible with the local resources only, it links the recipient economy into the world economy in manners that would be hard to achieve by new firms of a purely local origin. According to Lipsey and Chrystal (2003) the FDI alters country’s comparative advantages and improves its competitiveness through technology transfer and effects myriad externalities, domestic investment which can alter a country’s volume and pattern of trade in many income enhancing directions. Countries that suffer from corruption, slow‐moving, or ineffectual government are likely to resistant the change (La Porta et al., 1999) but in such countries, the opportunity and switching costs are lower which makes the possibility of adopting IFRS advantageous. Kumar (2007) the foreign capital has the potential to deliver enormous benefits to developing nations. in addition to helping bridge the gap between savings and investment in capital-scarce economies, capital often brings with it modern technology and encourages development of more mature financial sectors. Capital flows have proven effective in promoting growth and productivity in countries that have enough skilled workers and infrastructure. Some economists believe capital flows also help discipline governments’ macroeconomic policies.

2.4 ISSUES & IMPLICATIONS OF IFRS ON FDI AND THE ECONOMY

The IFRS is a global GAAP, setting principles–based and globally accepted standard published by the IASB to support those who adopted in the preparation and presentation a high quality, transparent and comparable financial statements that will aid easy interpretation. Okoye & Akenbor (2012), the perceived challenges to be presented by IFRS adoption and implementation includes: the intrinsic problems of aligning with IFRS pointed out that international accounting clearly has a language problem (Ukpai, 2002), Adams (2004) claimed that where an accounting standard conflicts with government policy, the standard is revised such as the LIFO method of stock valuation not allowable for tax purpose in Nigeria, Another problem inherent with the adoption of IFRS is the universal tendency to resist change (NASB 2010). Gambari (2010) noted that the successful adoption of IFRS entails assessing technical accounting, tax implications, internal processes, and statutory reporting, technology infrastructure, and organizational issues. FDI has been defined in several ways.

According to Kumar (2007 Kumar (2007) FDI which involves building long-term relationships with enterprises in foreign countries can be made in several ways:

First, and most likely, it may involve parent enterprises injecting equity capital by purchasing shares in foreign affiliates. Second, it may take the form of reinvesting the affiliate’s earnings. Third, it may entail short- or long-term lending between parents and affiliates. To be categorized as a multinational enterprise for inclusion in FDI data, the parent must hold a minimum equity stake of 10 percent in the affiliate (Kumar, 2007). Garkovic and Lavin (2002), noted that economic rationale for offering special incentive to attract FDI frequently is derives from the belief that foreign investment produces externalities in the form of technology transfer and spillovers. DeGregorio (2003), while contributing to the importance of FDI noted that it allows a country to bring in technologies and knowledge that are not readily available to domestic investment and increases productivity throughout the economy (Oyetoye et al., 2011). Jeffrey and Spaulding (2005) also stated that FDI advantage includes; circumventing trade barriers, hidden and otherwise making the move from domestic export sales to a locally-based national sales office and capability to increase total production capacity Opportunities for co-production, joint ventures with local partners, joint marketing arrangements. In recent times, it was revealed that FDI in Nigeria have been declining (NASB, 2010). According to NEF (2011) the trend shows that the value declined from $6.9 billion in 2007 to about $4.602 billion in 2008 and $3.94 billion in 2009 and $6.1b in 2010. The decline in 2010 was due to ongoing uncertainty related to the proposed Petroleum Industry Bill (PIB) as well as political unrest in the some section of the country. The new FDI was estimated at $6.8bin 2011. Nigeria is the third largest recipient of FDI in Africa after Angola and Egypt.

2.5 THE RELATIVE IMPACT OF IFRS

The last decade has seen the emergence of considerable research discussing the influence of legal and institutional settings on accounting quality (e.g., Byard et al., 2011; Soderstrom and Sun, 2007). In several cases, the research is based on the assumption that these settings have a significant impact on accounting quality, which, in turn, affects analysts’ ability to make accurate forecasts. Other studies have also emphasized firm-specific characteristics, as well as the importance of reporting firms’ incentives as salient factors in the success of IFRS. Byard et al. (2011) and Jeanjean and Stolowy (2008), for example, stress the importance of firms’ reporting incentives, which are influenced by legal institutions, various market forces, firms’ operating characteristics and the like. In line with Zeff (2007), it is therefore reasonable to assume that country-specific differences such as business and financial culture, accounting culture, auditing culture and regulatory culture are likely to affect the success of IFRS implementation.

We should therefore expect the introduction of IFRS to have different effects on accounting quality in different legal and institutional settings. For instance, one variable aspect is the strength of accounting standard enforcement (Preiato et al., 2010), which influences managerial discretion. Studies by Francis et al. (2003) and Hope (2003), among others, found that common law countries (i.e., the UK and Ireland) have stronger enforcement mechanisms than code law countries (i.e., the rest of the EU). The international accounting literature also indicates that accounting quality is higher in countries with a common law origin (Ali and Hwang, 2000; Ball et al., 2000; Leuz et al., 2003), and enforcement mechanisms appear to influence the expected quality of investment decision making under IFRS (Ball et al., 2000; Ball, 2006; Barth et al., 2008; Byard et al., 2011; Dao, 2005; Daske et al., 2008). Barth et al. (2008) conclude that the potential benefits of the introduction of IFRS are difficult to attain without the existence of effective enforcement mechanisms (cf. Byard et al., 2011; Preiato et al., 2010).

Another important factor is the quality of the accounting standard previously used in a given country. If the standard was of low quality, the positive effects of changing to a standard that better reflects a firm’s underlying economic value would be expected to be more significant (Byard et al., 2011). The magnitude of differences between IFRS and the local GAAP that they have replaced varies considerably (Bae et al., 2008; Nobes, 1983), and it is therefore reasonable to expect IFRS’ effect on analyst performance to vary among countries.

2.6 GLOBAL ACCOUNTING CONVERGENCE

The idea of accounting standards convergence can be traced back to the 19th century, when the conception of international standards took essence during the 1st international congress of accountants in 1904 (Ball, 2006). In the 1950s, in response to integration of economies and improvement in cross border trade after the Second World War, the idea of convergence also deepened (Floropoulos, 2006). The call continued until 1966 when prominent professional accountancy bodies of the world namely; the Institute of Chartered Accountants of England and Wales, Association of Certified Public Accountants of America, and Canadian Institute of Chartered Accountants emanated together to deliberate on the need to have International Accounting Standards. The meeting was then chaired by the president of Institute of Chartered Accountant of England and Wales in person of Sir Henry Benson. According to them, after extensive discussion, the bodies decided to form a study group to carry out comparative studies on accounting practices amongst the participating states.

During the eleven year life span of the group, about 20 studies were performed on accounting and auditing issues and subsequently, the group resolved to establish International Accounting Standards (Das, Shil & Pramanik, 2009). The establishment of International Accounting Standards led to the formation of the International Accounting Standards Committee (IASC) in 1973, this committee was saddled with responsibilities of setting International standards. This was as a result of the consensus by the sixteen professional accounting bodies from; Australia, UK, USA, Canada, Japan, Ireland, France, Germany, Mexico and Netherlands (Floropoulos, 2006). IASC performed very brilliant jobs, because it’s

among their success, the development of 41 different set of standards to take care of different financial reporting matters. Even though, IASC lacked the power in promoting the standards, ensuring its application and achieving universal harmonization among various countries. But then, they did a wonderful job.

As financial markets are becoming more global, world economies are becoming more interconnected, couple with the fact that no country can brag “self-reliance” without depending on another country (Europeens, 2001) the situation further suggested the need to improve the activities of IASC in order to achieve the objective of global accounting harmonization. In 2001, as part of the effort, IASC was restructured and renamed to International Accounting Standard Board (IASB) to continue with reforms and improvement of the plans so that to expedite the achievement of the Board objectives (Cortese, & Irvine, 2010). Part of the improvement efforts; International Accounting Standards (IAS) was retitled to IFRS and was made more flexible than IAS (Paglietti, 2009). At the outset, the idea was to harmonize the accounting standards, i.e. to minimize the variances that existed in the accounting principles being applied in the major capital markets across the globe, but the notion of harmonization was later replaced by the concept of convergence, which aims at achieving single uniform set of high quality global standards that can be applied at least in all the major capital markets around the world (Paglietti, 2009).

IFRS are designed as a common global language for the company’s activities in order to improve the quality, understanding and comparability of financial reporting across international boundaries. The standards are said to achieve three fold objectives; firstly, assisting in standardizing the diverse accounting policies existing around the world and eliminate the incomparability of financial statements within and across entities. Secondly, facilitate the presentation of high quality, transparent and comparable information in financial statements. Thirdly, reduce to accounting alternatives and thereby eliminate the element of subjectivity in financial statements (Chakrabarty, 2011).

In line with the above, the questions that demand for an answer is whether IFRS is feasible to all countries of different settings, especially the developing nations. This is because, looking at the trend in the International Accounting Standards setting processes, it was clear that the founders of this global standards were all from the highly industrialized economies, sharing common characteristics in most cases and the decision to have these common accounting standards was taken based on the situation that best fit the participating countries, in terms of economy, laws and regulations, politics etc. None of the developing countries was considered in the comparative studies carried out which later led to the development of IAS (now IFRS). Therefore, this enables researchers concerned to determine the rationale behind its development. To this end, the researchers come out with the notion that; diversity in culture, politics, law and regulations and business environments among countries is large, that single set of accounting standards cannot be applicable to all countries. While others suggested that the flexibility of global accounting standards should allow the disparity in culture, politics, laws and regulations and business environment to be accommodated under single set of accounting standards.

In this vein, Wong (2004); argues that converging to a single set of accounting standards can be seen as effectively realised when the financial information allows investment to make comparison, when it lowers cost of capital, when the allocation of firms’ resources is seen to be efficient and when high economic growth is achieved. Hail, Leuz, and Wysocki (2009) believes that global accounting convergence is likely to improve the quality of firms’ reporting system, reduce the firms cost of capital and enhance market liquidity. Because it was found that, convergence to IFRS enable investment to figure out opportunities better, enable multinational corporations to use common accounting language in the preparation and presentation of their financial statements using similar language of that of their competitors (Bartov, Goldberg, & Kim, 2005).

In the study carried out by Ikpefan, and Akande (2012) expressed that, convergence of global accounting standards cannot be separated from politics, increased compliance cost, and deprivation of business operations. According to the study, accounting standards setting is often being inspired by political motives to transfer resources from less desirable sector to most desirable ones and the effects of this resources transfer is usually being influenced by interest groups by way of lobby. In respect to the cost implications, the study opines that global accounting convergence would create one-off convergence costs and continuous maintenance costs of the global standards as well as costs of training the regulators, preparers, auditors and other financial professionals and the cost of retaining the trainers for a reasonable period of time. Regarding the deprivation of business operation, the study claims that many businesses would be deprived the opportunities to run their businesses in jurisdictions that apply the accounting standards that best suits their line of business.

To this end, it can be understood that, international accounting convergence is crucial and timely in this era of increased globalization. Although, it might create some difficult experience, but then, the benefits to be derived from it seem to overshadow the problems. It is expected to result in consistency and uniformity of the financial system, minimizes cost of doing business and serves as a protective measure to investment by increasing their confidence no matter where the business occurs. It is also believed that investment’ willingness to diversify their investments across international boundaries will be encouraged if financial information are prepare under single set of standards that can be relied by them. Despite the above advantages of such convergence, only limited companies converge with the international accounting standard especially the developing nation. Therefore, in view of that, this research demonstrated the effect of IFRS acceptability and enforceability on global accounting standard convergence.

2.7 IFRS ACCEPTABILITY

For financial reporting to be credible, the standards upon which the financial statement is prepared must be acceptable. The financial standard should be design in such a way to be well suitable and applicable (Wulandari & Rahaman, 2004). In regard to previous study, Zeff (2008) study the determinants of voluntary acceptance and adoption of IFRS by some listed firms on the unregulated market by analyzing their annual reports. The study reveals that, certain vital elements are

observed to be the determinants of voluntary acceptance and adoption of IFRS in these firms, these include; firm size, firm assets and the industry. They highlight that the larger the size of a firm the greater its possibility to voluntarily accept and adopt IFRS. The study recommend that firms’ size, firms’ assets is another important element in determining voluntary acceptance and adoption of IFRS, as heavy investments in assets serve as a protector and tend to constitute strong entry barrier to firms wishing to switch to IFRS. Finally, they suggested that, Industry is another determinant of voluntary acceptance and adoption of IFRS; for instance, firms under utility or consumer goods industry may not likely to accept and adopt IFRS than firms under other sectors.

Dholakia (2013) stated that, the shift to IFRS by the some countries credit organization in the recent period is considered as a giant stride towards achieving global accounts harmonization in such countries. Preparers of accounts from various country’s especially banking sector expressed their total support towards the application of the common global accounting standards, describing it as a positive development in the country’s reporting system and the assessment of cost-benefit is perceived to be positive. This contradicts the finding of the survey conducted by Jermakowicz & Gornik-Tomaszewski (2006) who attempts to determine the level of acceptability of IFRS and its application by investment funds supervisors as well as determining how well-informed and appreciative investment funds administrators and managers were, with regards to IFRS, in 41 European Union Countries.

The survey shows low level of acceptability among the fund supervisors in which 79% of them expressed their preferences of local GAAP to IFRS in achieving quality reporting system in the industry. In addition, majority of the fund managers (58%) also preferred using the domestic GAAP to IFRS while 22% of the managers that have already incorporated both IFRS and local GAAP in their reporting system express no intention of total switch to IFRS. The common idea in the responses generated, indicates that IFRS would only be applicable when it is made mandatory (Jermakowicz & Gornik-Tomaszewski, 2006). Therefore, this indicates that the acceptability of IFRS required some enforcement from the authority concerned.

Pawsey (2010) conducted a survey in Australia in 2005 and 2008, to determine the perceived quality and complexity of the global standards, the result reveals different degrees of acceptability amongst the account preparers towards the quality of IFRS. According to study, the 2005 survey reveals; majority of account preparers surveyed disagree with the perceived quality attributed to IFRS as in their opinions is more complex than Australian standards. To them IFRS lacks the quality of being accepted. But as time passes by, the perceptions of the preparers seemed to change; the result of 2008 survey indicates improved acceptance of IFRS as a quality standards in terms of stringent application guidance on certain issues not addressed by Australian standards, but they believed that IFRS compared to Australian standards is more complicated, costly, time consuming, and leads to user confusion.

Jones and Higgins (2006) conducted a surveyed among 60 Australian firms, believed to be among the top 200 companies in the country, to determine how account preparers in these firms accept the shift from Australian Accounting Standards to IFRS. The result signposts that numerous of the respondents expressed cynicism in the presumed benefits to be derived from the single set of global standards, while others were strongly doubtful of the whole Australian reform agenda in respect to the IFRS application, most of the criticism was noticed to largely come from small sized firms in the country, which according to the study raised another concern on whether IFRS would be acceptable and relevant to small sized companies.

Liu et al (2011) stated that, the result of the survey carried out among 163 chief financial officers and investment across Europe, US, Middle East and Asia, reveals less resistance of IFRS by investment and CFOs. The increasing understanding of the standards among investment and CFOs was believed to broke down the resistance attitude with about 40% of the respondents confessed that IFRS has increased more access to capital, while about a quarter of the respondents believed that IFRS has brought reduction in cost of capital. Many respondents believed IFRS would facilitate consistent regulation, bring greater disclosure in presentation of information regarding financial reporting and sustainability and corporate governance report would also be more transparent.

Equally, the study of James, (2009) displayed that IFRS knowledge and acceptance by accounting students are considered as important contributing factors towards the successful IFRS journey. The study attempts to explore how accounting students and other related discipline perceive and accept IFRS as a quality accounting system of reporting, using a structured questionnaire to generate relevant data on the subject. The study reveals that, the acquisition of IFRS knowledge is more important than the acquisition of the existing accounting knowledge by the students of accounting in this contemporary accounting world. Hence, 75% of the respondents expressed acceptance and confidence in IFRS as

global quality reporting standards capable of improving accounting reporting system. Although, students from other related disciplines seemed to accept US GAAP as more appropriate global accounting standards than IFRS, while accepting the US GAAP as another quality standards. The study concluded that students of accounting reasoned that the internationalization and the interconnectivity of financial markets demonstrate the relevance of IFRS knowledge in updating the existing accounting knowledge and in providing accounting graduates with greater opportunities in the world financial markets.

Zeff (2008) reveals firm size, firm assets and the industry to be vital elements determinants of voluntary acceptance and adoption of IFRS. Dholakia (2013) reveals that, preparers of accounts from the banking sector expressed their total support towards the application of the common global accounting standards, describing it as a positive development in the country’s reporting system and the assessment of cost-benefit is perceived to be positive. The finding of Jermakowicz, and Gornik-Tomaszewski (2006) shows low level of acceptability among the fund supervisors with 79% of them showed their preferences of local GAAP to IFRS in achieving quality reporting system in the industry. While Liu et al, (2011) stated that the result of the survey carried out among 163 chief financial officers and investment across Europe, US, Middle East and Asia, reveals less resistance of IFRS by investment and CFOs. In addition, James (2009) explores how accounting students and other related discipline perceive and accept IFRS as a quality accounting system of reporting.

2.8 IFRS ENFORCEABILITY

The introduction of IFRS in any particular jurisdiction would simply constitute a part in the laws and regulations existing in that jurisdiction relating to how business affairs are being governed. Often times, these laws and regulations try to overlay one another or simply become inconsistent especially when sound enforcement mechanisms are absent or the role of various institutions responsible for the enforcement are not well defined (NASB, 2010). The role of institutional

infrastructures in ensuring rigorous and effective application of IFRS cannot be over emphasized. Realizing the benefits attached to these global standards requires strong legal, institutional and professional support (Europeens, 2001). Hence, lack of stringent and clearly define enforcement and regulatory system as well as quality professional accountants may result in inefficiency and inappropriate application of IFRS. Moreover, for the adoption of IFRS to be effective, there should be an adequate awareness campaign and improvement in the quality of a professional accountant, at the same time, professional accountants are required to give orientation on how IFRS are being applied (James, 2009).

Wulandari and Rahaman (2004) assert that having accounting standards in place, does not guarantee effective regulation mechanism; institutional infrastructures for the application and enforcement of these standards are also vital in providing the standards with the aptitude to make financial information relevant for all capital markets. Strong institutional infrastructures and sound enforcement apparatus will enable investment to develop confidence that financial reports reveal a true and fair view of the firm’s fundamentals. In addition, enforcement mechanisms are indispensable elements in the application of IFRS, unless consistently and rigorously enforced, so that perceived benefits of the new set of standards can be reaped (NASB, 2010).

Paglietti (2009) reveals that countries with sound enforcement changes during IFRS introduction, tended to benefit more from increased liquidity than countries with no changes in enforcement mechanisms. The study confirms that countries that made changes in the enforcement mechanism without even moving to IFRS also experienced increased liquidity benefits than countries that did not make changes in the enforcement mechanism during the IFRS adoption. Therefore, changes in enforcement mechanism play a vital role in attaining liquidity benefits before and after IFRS introduction. Hence, achievement of IFRS targeted objectives can be concurrently accomplished with proper and sound enforcement mechanism in place.

Pawsey, (2008) explore how effective is enforcement mechanism in realising the benefit of IFRS, using firm-month observations of 391,462 firms from 51 countries in Europe and Australia that mandatorily apply IFRS, with US and

Canadian firms used as control sample between recent financial years. The study reveals lesser error and low dispersion for users of IFRS as well as firms in jurisdictions with strong enforcement mechanism. In this vein, robust institutional infrastructures and strong monitoring mechanism were found to be an important factor in improving reporting quality and reducing income smoothing for both domestic and cross border listed firms in the UK after the adoption of IFRS, (Jermakowicz, & Gornik-Tomaszewski, 2006).

Having Accounting Standards in place do not guarantee effective regulation mechanism; institutional infrastructures for enforcement and monitoring the application of these standards are also vital in providing the standards with the ability to make financial information relevant for all capital markets (Wulandari & Rahaman, 2004). Paglietti (2009) equally reveals that, countries with sound enforcement changes concurrent with IFRS introduction seemed to benefit more from increased liquidity than countries with no changes in enforcement mechanisms.