Gusau Journal of Accounting and Finance (Apr 2021)
FAIR VALUE MEASUREMENT HIERARCHY AND COSMETIC ACCOUNTING IN THE NIGERIAN DEPOSIT MONEY BANKS
Abstract
The study investigated the effect of fair value financial instruments measurements hierarchy disclosures on cosmetic accounting practices in the Nigerian DMBs, given the possibility of managerial discretion to manipulate the disclosure of fair value measurement, particularly level three fair value hierarchy which is based on adjusted unobservable inputs. The study used a sample of fourteen DMBs in Nigeria that have published their audited annual financial report between 2012 and 2018. The data were subjected to a multiple regression analysis to explore possible effects of fair value measurements on cosmetic accounting. The results revealed that fair value measurements hierarchy significantly reduced the tendency of Nigerian DMBs to manipulate earnings. Specifically, level one and level two fair value measurements which are respectively based on unadjusted and adjusted observable market information were found to be negatively and significantly influencing the level of cosmetic accounting practice among DMBs in Nigeria. On the other hand, result reveals level three fair value measurement is positively and significantly influencing the cosmetic accounting practices. By implication, the findings corroborate the arguments that fair value hierarchy level one and level two will protect accounts from earnings manipulation while level three measurements will enhance unethical accounting practice because the estimate is largely based on adjusted unobservable market information. Therefore, the study recommends the need for regulatory authorities to create an active market for financial instruments in order to fully achieve the fundamental objective of fair value. Also there must be effective supervisory and regulatory framework to limit the uncertainty and ambiguities around the application of level 3 fair value hierarchy.
