Inflation Accounting and Corporate Earnings Quality in Nigeria

Persistent inflation poses significant challenges to financial reporting in emerging economies, particularly in Nigeria, where macroeconomic instability distorts corporate earnings. This study examines the relationship between inflation accounting and corporate earnings quality among Nigerian non-financial listed firms, with corporate governance as a moderating factor. Adopting an ex-post facto research design, the study utilizes panel data from 30 firms over the period 2014-2024, yielding 300 firm-year observations. Secondary data were sourced from annual reports, the Central Bank of Nigeria, and the Nigerian Exchange Group. Earnings quality was proxied by accrual quality, inflation accounting by the ratio of revalued assets to total assets, and corporate governance by a composite index of board independence, audit committee effectiveness, and meeting frequency. Panel regression, supported by correlation and diagnostic tests, was employed for analysis. The findings reveal that inflation negatively affects earnings quality (β = -0.342, p < 0.01), confirming that historical cost accounting distorts financial reporting under inflationary conditions. In contrast, inflation accounting significantly improves earnings quality (β = 0.421, p < 0.01), while corporate governance strengthens this relationship (β = 0.365, p < 0.01) by enhancing transparency and limiting opportunistic reporting. Firm size shows a positive effect, whereas leverage negatively influences earnings quality. The study concludes that adopting inflation-adjusted accounting practices alongside strong governance mechanisms is essential for improving financial reporting reliability in inflationary environments. These findings offer important implications for regulators, firms, and investors seeking to enhance earnings credibility in emerging markets.