CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY
Public trust in a country has been shown to affect its economic growth and development, capital market development, government regulation and international trade (Knack and Keefer, 1997, Stulz and Williamson, 2003, Guiso, et al., 2006 and 2008). These studies are premised on the idea that interpersonal trust affects contracting costs in an economy: greater trust enables greater economic activity that requires an agent to rely on another agent‟s future actions. In public corporations, capital market participants (investors and creditors) entrust managers with their invested capital and rely on them to create value by deploying these assets in the most productive manner available. Periodic accounting reports are an important source of information for capital market participants to monitor managers‟ actions that affect the value of their investments. In this study, the we posit that the level of trust in an economy affects capital market participants‟ subjective beliefs about the credibility of periodic accounting reports, thereby affecting investors‟ demand for accounting disclosures.
The in formativeness of firms‟ financial reports are affected by regulations that mandate accounting disclosures as well as by investors‟ and other stakeholders‟ demand for information. Accordingly, we distinguish between firms‟ accounting quality that is influenced by regulated (mandated) reporting requirements and firms‟ accounting and disclosure practices that are affected by managerial choices made in response to the institutional environment within a country. The level of trust in an economy potentially affects both regulators‟ incentives to mandate firm disclosures and capital market participants‟ demand for accounting information.
Public trust is potentially negatively associated with financial reporting and disclosure quality if investors‟ demand for information declines in their trust of firm insidersIn high trust economies, arms length investors would place a low likelihood of being cheated by firm managers or controlling owners, and therefore choose a low disclosure regime (Pinotti, 2008, and Aghion et al., 2010). The upshot being that public trust is negatively associated with both mandatory and voluntary firm accounting quality. From the forgoing therefore, the study is determined to examine the issues and prospect of financial reporting and public trust.
1.2 STATEMENT OF PROBLEMS
In high-trust economies, firms‟ managers are more likely to disclose information since they believe that investors are more likely to revise their priors in light of accounting since they view these information as credible. Mistrust on the other hand would lead participants to disregard disclosed information thereby reducing managers‟ incentives to be forthcoming. Further, greater trust in an financial reporting promotes the development of institutions that complement financial reporting and disclosure and thus increases the returns to firms‟ reporting activities (Carlin, 2010, and Boduh-creed, 2010). Finally, higher quality financial reporting may causally increase investor trust and thus lead to a positive observed association between accounting quality and trust.
To test these competing explanations regarding the association between public trust and financial reporting, the study empirically examines the association between financial reporting and public trust: Issues and prospect.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to examine financial reporting and public trust: issues and prospect. The specific objectives are as follows:
iii. To examine the challenges of financial reporting and public trust in Nigeria.
1.4 RESEARCH QUESTIONS
iii. What are the challenges of financial reporting and public trust in Nigeria.
1.5 STATEMENT OF HYPOTHESES
HO: There is no significant impact of financial reporting on public trust.
HI: There is a significant impact of financial reporting on public trust.
1.6 SIGNIFICANCE OF THE STUDY
The study examines the issues and prospect of financial reporting and public trust. The study will contribute to the growing literature on public trust.
The study will also help the government in formulating policies that can guide accounting in their financial report quality and maintain ethical standards that can build public trust in the country.
The results of this study will be of importance to related research on: (i) how trust affects economic outcomes, and (ii) how informal institutions such as social norms and culture affect accounting quality and earnings management.
Given that accounting information is used for contracting and investment decisions, the result of this study will contribute to additional channels through which trust can affect economic performance and development in a country (beyond traditional formal institutions).
1.7 SCOPE OF THE STUDY
The scope of the study covers the issues and prospect of financial reporting and public trust with special references to the Rivers State ministry of finance.
1.8 LIMITATION OF THE STUDY
Financial constraints: Financial was one of the major constraint that limited the study. This is consequent of the fact that the researcher’s sources of financial support were not able to adequately take care of her academic financial responsibilities and the project work.
Time constraint: Another major constraint that affected this study was time. This was due to the fact that the study was conducted amidst normal academic studies. To this end therefore, it was difficult for the researcher to meet up some of the appointments with respondents.
Unavailability of materials: Another major constraint to this study was unavailability of materials.
1.9 DEFINITION OF TERMS
Public Trust: Trust created for the promotion of public welfare and not for the benefit of one or more individuals.
Financial Reporting: Financial reporting is the process of producing statements that discloses an organization’s financial status to management, investors and the government.
Accountant: an accountant is a practitioner of accounting or accountancy which is the measurement, disclosure or provision of assurance about financial information that helps managers and investor.
Auditing:It is the Onsight verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to requirements.
Audit:An audit is a systematic and independent examination o books, accounts, statutory records, documents and vouchers of an organization to ascertain how fair the financial statements as well as non-finacial disclosure present a true and fair view of the concern.