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FIRM CHARACTERISITCS AND MANDATORY ACCOUNTING INFORMATION DISCLOSURE IN NIGERIA LISTED OIL AND GAS COMPANIES
CHAPTER ONE:
INTRODUCTION
1.1 Background of the Study
Mandatory accounting information disclosure refers to the legally required provision of financial and non-financial information by firms to stakeholders, particularly regulators, investors, and the public. In Nigeria, this disclosure is governed by standards and regulations from bodies such as the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and international frameworks like the International Financial Reporting Standards (IFRS). These mandatory disclosures are vital for transparency, corporate governance, and investor confidence, especially in industries that are critical to the economy, such as the oil and gas sector.
The oil and gas industry plays a significant role in Nigeria’s economy, contributing to a large portion of government revenue, foreign exchange earnings, and Gross Domestic Product (GDP). Due to the strategic importance of the sector, listed oil and gas companies are under increased scrutiny to provide comprehensive and transparent accounting information. The quality and extent of these disclosures are influenced by several firm characteristics, including size, profitability, ownership structure, and leverage. Understanding the relationship between these characteristics and the level of mandatory disclosure can provide insights into compliance behavior and highlight areas where regulation may need strengthening.
In recent years, stakeholders have raised concerns about the adequacy of disclosures in the Nigerian oil and gas sector. These concerns are centered around issues like environmental impact, corporate governance, financial performance, and compliance with reporting standards. Given the sector’s high risk, complex operations, and influence on public welfare, the transparency of accounting information is crucial. The firm characteristics that may affect mandatory accounting disclosure in listed Nigerian oil and gas companies warrant systematic investigation to ensure that regulations are effectively promoting transparency and accountability.
In order to examine the effect of firm characteristics on environmental disclosure practices of oil and gas firms in Nigeria. It is important to establish a clear definition of environmental disclosure. It can be define as the provision of public and private information, financial and non-financial information, and quantitative and non-quantitative information regarding to the firm’s management of environmental issues. This information is provided in the annual reports or in any other form, mostly of the time a separate environmental report is issued (Gray, Kouhy & Lavers, 1995). This separate environmental report is often referred to a CSR report. The World Business Council for Sustainable Development (2002) suggests that public reports by companies are designed to provide internal and external stakeholders with a picture of corporate position and activities on economic, environmental and social dimensions. In short, such reports attempt to describe the company’s contribution toward sustainable development.
KPMG (2008) carried out an international survey of corporate social reporting on the 100 largest companies by revenue from a sample of 2200 firms in 22 countries and conclude that environmental reporting is widely adopted by organizations, as the 80 percent of the world’s largest companies issues stand-alone CSR reports: The question is no longer who is reporting but who is not? Corporate responsibility reporting is now a mainstream expectation of companies (KPMG, 2008).
CIMA (2012) defines environmental reporting as the public disclosure of information concerning an entity’s environmental performance and it makes organizations appear more accountable for the economic, environmental and social consequences of their activities. Environmental reporting according to (Beredugo & Mefor, 2012), is very important as it enhances the quality of decision making, requiring firms to establish a standard and set reduction targets and the realisation of the importance of changing unsustainable consumption and production patterns alongside protecting and managing Nigerian national resources; the information contained in environmental reports are necessary for accountability, comparability and probity, hence when not made available could be held synonymously with being bias, not transparent, fraudulent and liable to risk which in turn could dissuade patronages from consumers, suppliers, investors and surrounding communities.
A research shows that more and more organizations decide to report environmental information to their stakeholders. In the early 1990s, Roberts (1991) concludes that despite the majority of the companies in France, Germany, the Netherlands, Sweden and Switzerland disclosed environmental information; however, the level of this information is low. Nevertheless, a study performed by Kolk (2003) on the 250 largest Fortune 500 companies
(this data represents companies from France, Germany, Italy, Japan, the Netherlands, South Korea, Switzerland, the UK and the US) during the years 1998 to 2001, concludes that sustainability reporting has increased considerably within those countries. The author also concludes that environmental reporting is applied more in the industrial sectors than in the financial sectors. The level of environmental disclosure is also depending on country specific legislation and the reporting culture of the country. The companies make more environmental disclosures in such regulated countries, especially in the USA, Canada and the UK either because environmental reporting is mandatory or because society or stakeholders demand reporting (Gray, Kouhy & Lavers, 1995; Hackston & Milne, 1996).
Firm size has been found to be an influential variable in explaining differences in disclosure practices among firms (Archambault & Archambault, 2003). There are several reasons for a positive association between firm size and the extent of natural wealth disclosure Disclosing detailed information is costly, and thus may not be affordable for small firms while large firms are usually diverse in the scope of their business, the types of products and geographical coverage therefore incurred less unit cost. The marginal cost of disclosing the information publicly is low for larger firms (Cooke, 1989). Disclosure of detailed information placed small firms at a competitive disadvantage with other large firms in the same industry.
Purnomosidhi (2006) suggests that the firm size is used as independent variable with the assumption that larger firms do a lot more activities and usually have many business units and has the potential for long-term value creation. Also, Sembiring (2005) reports that larger firms have shareholders who pay attention to information contain in annual reports. Annual reports are medium used to disseminate information about the social responsibility of the company. Shareholders think information disclosed by firms’ annual reports about natural wealth disclosure activities has the pivotal role in boosting the financial performance of their firms.
Firm age is expected to have the positive relationship with natural wealth disclosure Old firms are more likely to know the details of business as they are familiar with the working environment and community where they operate. They have the experience of belonging to the surrounding environment and expect to act as a good citizen in the community by disclosing more natural wealth information. In addition, old firms realize more than other the value of high disclose towards attracting investors and shareholders. Widiastuti (2002) notes that firm age can demonstrate that the company still exists and compete favourably.
When profitability is high, management is more willing to disclose information about natural wealth by firms which will ultimately improve company performance (Vasanth, 2015). Unprofitable firms will be less inclined to release more information to hide their poor performance. However, Ndukwe and John (2015) find that profitability does not cause an increase in the environmental disclosure. There are different measures of profitability such as net income, profit margin, return on assets, and return on equity. In this study return on assets was chosen as a proxy for profitability.
Tareq, Reza and Aminu (2017) study the impact of corporate characteristics on social and environmental disclosure among manufacturing firms in Jordan from the stakeholders’ point of view. Firm size, profitability, audit firm, ownership, type of industry and financial market level are the factors examined in the study. They use panel dataset. The study reveals that there is a positive and significant relationship between corporate size and environmental disclosure. Similarly, De Silva and Aibar-Guzman (2010) evaluate the environmental disclosure of 109 firms in Portugal. Firm size shows positive significant effect on environmental disclosure.
Samaneh, Reza, and Mehrdad (2016) interrogate the factors affecting the level of information disclosure of listed Companies in Tehran Stock Exchange. The study is an applied research and used multivariate regression. The population of the study is all companies (82) listed on the Tehran Stock Exchange during 2009-2014. The independent variables are Firm size, firm Age, profitability, Leverage and Liquidity while the dependent variable is the information disclosure. The results show that there is a positive and significant effect between firm size and environmental disclosure of listed Companies in Tehran Stock Exchange.
In the same vein, Mohammad (2015) examines 73 Jordanian Industrial public shareholding companies listed in Amman Stock Exchange (ASE). The study applies CSRD checklist for measuring the extent of CSRD in annual reports of these companies. Regression analysis was used to examine the relationship between Leverage, profitability and firm size with CSRD. The study finds that firm size positively and significantly influenced CSRD. Similarly, Bahman and Mohsen (2010) investigate voluntary disclosure quality of information and some factors influencing it for this purpose, companies ranked on the Tehran Stock Exchange which included 311 companies were chosen as the research statistical society. The study finds that there is positive and significant relationship between environmental disclosure and firm size.
However, Francisco, Ana, Rute and Fatima (2014) conduct a research on environmental disclosure using data from listed on the Lisbon Euronext Stock Market. The study was conducted during the period of 2007-2009. Firm size, profitability and economic sector were examined in the study. The result suggests that the correlations between the firm size and the environmental disclosure is negative. In Saudi Arabia, Abdulsalam (1985) investigates the effect between the extent of environmental disclosure and some corporate variables. He finds a negative and significant result with respect to firm size and environmental disclosure.
Ebiringa, Emeh, Chigbu1 and Obi (2013) examine the effect of firm size and profitability on corporate social disclosures using the Nigerian oil and gas sector. A sample of twenty quoted companies selected using the simple random sampling technique was utilized for the study. Secondary data extracted using content analysis of the audited financial reports of the selected companies for 2011 financial year was employed in the study. The ordinary least squares regression technique was used for data analysis. The findings show a negative and insignificant correlation between CSR disclosure and firm size while Profitability is positively and significantly related to CSR disclosure of the companies.
Murya (2016) examines corporate governance and corporate social responsibility disclosure: evidence from Saudi Arabia. The study examines 267 annual reports of Saudi non-financiallisted firms during 2007-2011 using manual content and multiple regression analyses and a checklist of 17 CSR disclosure items based on ISO 26000. The study finds that firm age is a positive significant effect on CSR disclosure.
Kabir (2014) assesses firm characteristics and voluntary segments disclosure among the largest firms in Nigeria using a sample of 76 companies. The study reveals that that firm age is positively and significantly associated with segment disclosure of the sampled firms. Similarly, Godos-Díez, Cago and Campillo (2011) find a positive and significant relationship between firm age and CSR disclosure.
Elijido-Ten (2009) observes that the average age of firms operating in the Malaysian economy is approximately 25 years in a comparison of Malaysian environmental reporting attitudes. The result indicates a positive but insignificant relationship with environmental reporting. The study which was based on the stakeholder theory justified it on the basis of the significance of stakeholder involvement in the reporting process. The research uses ordinary least square (OLS) regression to determine the relationship.
Ziba and Abdorreza (2016) investigate 104 firms over the period of 2006-2012 on the relationship between corporate characteristics and voluntary disclosure in Tehran stock Exchange. The independent variable includes firm size, firm age and profitability while voluntary disclosure was selected as dependent variable. The study used linear regression model to test the hypotheses. The findings reveal that there is a positively and significantly relationship between firm size and voluntary disclosure whereas there is negative relationship between profitability and voluntary disclosure. Das, Dixon and Michael(2015) examine 29 listed banks in Bangladesh from 2007 to 2011. The results indicate a positive and significant correlation between bank size and CSR disclosure.
Macarulla and Talalweh (2012) examine 132 Saudi listed firms using 2008 firm-year. The findings indicate a very low level of CSR disclosure (16%) and that the main CSR determinants are firm size, and firm profitability. Moreover, Khasharmeh and Desoky (2013) evaluate online-CSR disclosure in the Gulf Cooperation Council (GCC) Countries including 44 Saudi firms representing 26.99% of total sample. The results indicate that the average onlineCSR disclosure in Saudi Arabia is 21.86%; the second highest after Qatar (22.50%). The results indicate that firm profitability and firm size are positive determinants of online-CSR disclosure. In addition, Hussainey, Elsayed and Razik (2011) examine a sample of 111 Egyptian listed firms during 2005-2010. The study finds that profitability is the main determinant of CSR disclosure.
Khan (2010) examines a sample of all private commercial banks for 2007 and 2008 in Bangladesh. The results of the study indicate a positive and significant correlation firm size, profitability and CSR disclosure. Furthermore, Siregar and Bachtiar (2010) examine 87 publically listed firms on the Indonesian Stock Exchange in 2003. They find a positive and statistically significant correlation between firm size and CSR disclosure. Similarly, a positive and significant correlation was found between bank size and the CSR disclosure level. Similarly, Mahajan and Chanders (2007) find a positive and significant association between profitability and the level of corporate disclosures.
This study is anchored on the stakeholders’ theory. The basic proposition of the stakeholders
theory is that the firm’s success is dependent upon the successful management of all the relationships that a firm has with its stakeholders a term originally introduced by Stanford research institute (SRI) to refer to those groups without whose support the organization would cease to exist (Freeman 1983). In developing the stakeholders’ theory, Freeman (1983)
incorporates the stakeholders’ concept into categories: (i) a business planning and policy model, and (ii) a corporate social responsibility model of stakeholder management.
In the first model, the stakeholders analysis focus on developing and evaluating the approval of corporate strategies decisions by groups whose support is required for the firm’s continued existence. The stakeholders identified in this model include the owners, customers, public groups and suppliers. Although these groups are not adversial in nature, their possibly conflicting behavior is considered a constant on the strategy developed by management to best match their firm’s resources with the environment (Deegan & Gordon, 1996).
In the second model, the corporate planning and analysis extends to include external influences which may be adversarial to the firm. These adversarial groups may include the regulatory environmentalist and/or special interest groups concerned with social issues (Guthrie & parker, 1990). The second, model enables managers and accountants to consider a strategic plan that is adaptable to change in the social demands of nontraditional stakeholders groups. The stakeholder’s theory proposed an increased level of environmental awareness which creates the need for companies to extend their corporate planning to include the nontraditional stakeholders like the regulatory adversarial groups in order to adapt to changing social demands (Trotman, 1999). The main concern of the stakeholders’ theory in environmental accounting is to address the environment cost elements and valuation and its inclusion in the financial statements.
1.2 Statement of the Problem
Despite the critical importance of the oil and gas sector to Nigeria’s economy, there are concerns about the level of transparency and the adequacy of mandatory accounting information disclosure by companies in the industry. Several factors may influence the extent to which firms disclose required information, including their size, profitability, and leverage. There is limited empirical evidence on how these firm-specific characteristics affect the compliance levels of Nigerian oil and gas companies with mandatory disclosure requirements.
Moreover, some companies may exploit loopholes or ambiguities in disclosure regulations to withhold essential information, which could have adverse effects on stakeholders’ decision-making processes. These gaps in mandatory disclosure could hinder the development of the capital market, reduce investor confidence, and affect the overall efficiency and competitiveness of the oil and gas sector in Nigeria. Given the increasing regulatory pressure and the critical role of accounting disclosures in corporate governance, it is essential to examine how firm characteristics influence compliance with mandatory accounting disclosure requirements.
1.3 Objectives of the Study
The main objective of this study is to examine the relationship between firm characteristics and mandatory accounting information disclosure in Nigeria’s listed oil and gas companies. The specific objectives are:
To determine the extent of mandatory accounting information disclosure by listed oil and gas companies in Nigeria.
To examine the influence of firm size on the level of mandatory accounting information disclosure.
To investigate the impact of firm profitability on mandatory disclosure practices.
To assess the relationship between ownership structure and the extent of mandatory accounting information disclosure.
To evaluate how leverage affects the mandatory disclosure practices of oil and gas companies.
1.4 Research Questions
The following research questions will guide this study:
What is the extent of mandatory accounting information disclosure by listed oil and gas companies in Nigeria?
How does firm size influence the level of mandatory accounting information disclosure?
What is the impact of firm profitability on mandatory accounting information disclosure?
In what way does ownership structure affect the level of mandatory accounting disclosure in listed oil and gas companies?
How does leverage influence mandatory accounting information disclosure in the oil and gas sector?
1.5 Research Hypotheses
The following hypotheses will be tested in this study:
H₁: There is a significant relationship between firm size and the extent of mandatory accounting information disclosure in Nigeria’s listed oil and gas companies.
H₂: Firm profitability significantly influences the level of mandatory accounting information disclosure.
H₃: Ownership structure has a significant impact on the extent of mandatory disclosure practices.
H₄: There is a significant relationship between firm leverage and the level of mandatory accounting information disclosure in Nigeria’s oil and gas companies.
1.6 Significance of the Study
This study is significant for several reasons:
For Regulators: The findings will provide insights into how firm characteristics affect compliance with mandatory accounting disclosure regulations, aiding regulators in designing more effective enforcement strategies.
For Investors: By understanding how firm characteristics impact disclosure levels, investors can make more informed decisions regarding the transparency and reliability of financial reports in the oil and gas sector.
For Companies: The study will help oil and gas firms identify areas where they may need to improve their disclosure practices to comply with regulatory requirements and meet stakeholder expectations.
For Academic Research: This study contributes to the body of knowledge on corporate disclosure practices, particularly in the context of developing economies like Nigeria, and will serve as a reference for future research on the subject.
1.7 Scope of the Study
The scope of this study will cover listed oil and gas companies in Nigeria. The study will focus on the relationship between firm characteristics, such as size, profitability, ownership structure, and leverage, and the level of mandatory accounting information disclosure. Data will be drawn from annual financial reports of these companies over a defined period, and the research will be limited to mandatory disclosures as required by relevant regulatory bodies.
1.8 Limitations of the Study
Potential limitations of the study include:
Data Availability: Some companies may not fully disclose all the necessary data, which could limit the comprehensiveness of the analysis.
Generalization: The findings may not be easily generalizable to other sectors outside oil and gas due to the unique nature of the industry.
Regulatory Changes: Changes in accounting and disclosure regulations during the study period may affect the consistency of the data.
1.9 Definition of Terms
Mandatory Accounting Information Disclosure: The legally required provision of financial and non-financial information by firms to stakeholders as stipulated by regulatory bodies.
Firm Characteristics: Specific attributes of a company, such as size, profitability, ownership structure, and leverage, which may influence its operations and disclosures.
Leverage: The ratio of a company’s debt to its equity, reflecting the extent to which a firm is financed by debt.
Ownership Structure: The distribution of ownership rights among shareholders, which can influence a company’s decision-making processes and transparency practices.
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