1.1   Background of the Study

Globalization
of capital markets requires a unified global accounting, reporting and
disclosure set of standards. As a result of increasing volume of cross border
capital flows and the growing number of foreign direct investments via mergers
and acquisitions in the globalization era, the need for the harmonization of
different practices in accounting and the acceptance of worldwide standards has
arisen. This worldwide standard is International financial reporting standards
(IFRS). Although, there has been series of contentions as regarding the impact
of this standard on the quality of financial statements, but this study will
provide a clear understanding of their relationship.

International
Financial Reporting Standards (IFRS) is a set of principle –based issued and
established by International Accounting Standards Board (IASB) and generally
accepted by different countries around the world to ensure comparability and
transparency in accounting practice (Desoky and Mousa, 2014).The establishment
of such standards by IASB aimed at achieving harmonization and promotion of
financial practices to ensure consistency in reporting format across countries
which should minimize cost of processing financial information to investors and
improving efficiency of capital markets (Wen et al, 2011). Recently around the
world more than 120 countries and reporting jurisdictions required domestic
listed companies to prepare their financial statements in accordance with IFRS
(Mousa and Desoky, 2014). The adoption and implementation of IFRS has been one
of the most important events in accounting history of different countries
around the world which induce significant changes in the financial practices
(Kousenidis, et al, 2010). However, changes are found to vary among countries
and reported to be more serious in countries that had a code-law accounting
system (Ball et al., 2000). Before implementation of IFRS, existed accounting
system affected by severe government and legalistic influences which is in
contrast with a common-law accounting system countries like North America
(Kousenidis, et al, 2010). In a common law accounting system there is a proper
description of IFRS and accounting is mainly affected by the market
practitioners (Ball et al., 2000). With growing acceptance of IFRS by different
countries around the world, many researchers aimed to find out empirically
whether the new accounting standards has improved the quality of financial
statements that is reported to the users.

Furthermore,
banks constitute one of the pillars of economic development. It intermediates
funds between the surplus and the deficit economic units, thus stimulating and
promoting investments, economic growth and development. It follows that
increase in investment in the banking sector will lead to improved performance
of the economy. However, for any meaningful investment to occur in the banking
sector, quality financial information regarding share price and other
performance indicators are essential. Investors, who are usually different from
the management of the investments, only rely on the information supplied by
management in the financial statements, in assessing the risk and value of a
firm before deciding either to invest or to disinvest. The ability of the
financial statement to effectively and satisfactorily guide investors on their
investment decisions depends on the quality of such financial statements.

According
to Vishnani and Shah (2008), quality of financial statements implies the ability
of the financial information contained in the financial statements to explain
the stock market measures. The quality variable implies that data or amounts in
the financial statement are very correct and can form a useful guide for investors
in their pricing of shares. Investment decision, therefore, centres on the
association between stock returns or share price and accounting related
information such as earnings, cash flows, book quality of equity, firm’s size,
etc.

1.2   Statement of the Problem