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AN ASSESSMENT OF THE EFFECT OF CREATIVE ACCOUNTING PRACTICES ON THE REPORTED PROFIT OF NIGERIAN FIRMS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Creative Accounting also known as aggressive accounting is the process that deals with matters of accounting appraisal, conflicts, items and events. This flexibility gives room for manipulation, deceit, and misrepresentation. Hence, the accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business. Adekunle and Taiwo (2013).
Creative accounting refers to accounting practices that may or may not follow the letter of the rules of accounting standard practices but certainly deviate from those rules and regulations. It may be characterized by excessive complication and using innovative ways of characterizing income, assets and liabilities. It refers to the use of accounting knowledge to influence the reported figures, while remaining within the jurisdiction of accounting rules and laws so that instead of showing the actual performance or position of the company, they reflect what the management wants to tell stakeholders. Akenbor and Ibanichuka (2012)
Creative accounting practices occur because management has the discretion to choose accounting principles I n preparing financial statements (Barth, Landsman & Lang, 2006). This is as a result of loopholes created by the accounting rules that are often exploited by managers to generate undeserved and undue benefits. The numerous corporate failures therefore are indication of lapses in the corporate accounting information disclosure practices among corporations globally, Nigeria inclusive.
This has had derogative effects on the integrity of financial reporting and the audit profession. This captures the views of Arowoshegbe & Okunbor (2014), which observed that judging from the global financial scandals; the Financial Reporting Council of Nigeria (FRCoN) asserts that it is obvious that nations have strained the present system of the differential national accounting standards to its limit by managers. Thus, here enforcement of accounting rules and regulations is weak, creative accounting is common (Baralexis, 2018).
Creative accounting atitudes had resulted in the loss of several billions dollars in investment by shareholders and other investors. These collapses arose from accounting scandals in form of fraud, irregularities, material misstatements, involving major corporations such as Enron, Worldcom, Parmalat, Freddie Mac, American Insurance Group (AIG), Bernie Modott and the like. Hence, the need for the adoption of financial reporting that may curtail these ugly trends of financial crises made the International Accounting Standard Board (IASB) to pronounce International Financial Reporting Standards (IFRS) in the year 2001. Ikpefan & Akande (2012) opined that IFRS has indeed shaped accounting framework by its provisions for recognition, measurement, presentation and disclosure requirements relating to transactions and events that are reflected in the financial statements.
Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order to protect the guilty. Many terms can be used to describe the practices of changing the facts in accounting, e.g. cooking the books, aggressive accounting, massaging the numbers, window dressing, earnings management etc. The manipulation of financial numbers is prohibited by laws and accounting standards, they were against the spirit of not providing the “true and fair view” of a company that accounts are supposed to. The techniques of creative accounting change over time as accounting standards change. Alexander, A. S. (2016).
Many changes in accounting standards are meant to block particular ways of manipulating account, which means that intention creative accounting needs to find new ways of doing things. Moreover, one should be able to see that if creative accounting is practiced by any organization, there is plenty of scope of maneuvering and manipulation of the accounting information. Such manipulation might leave the shareholders, public, the government and any interested party absolutely confused as to what are facts and what is not real and true regarding a set of published set of accounting statements (Amat, Blake and Dowds, 2017).
It was anticipated that accounting figures generated in accordance with IFRS are of higher quality than those determined in line with domestic Generally Accepted Accounting Principles (GAAP). As a result, the expected benefits of IFRS are compelling, as the use of one set of high quality accounting standards by companies across the globe has the potential to improve the comparability and transparency of financial information and leave few or no options for creative accounting tendencies. Consequently, this study is aimed at examining creative accounting practices among Nigerian listed companies and the curbing effects of IFRS adoption, with emphasis on the Nigerian commercial banks (Van der Poll, & Gouws, 2004).
1.2 Statement of the Problem
Creative Accounting is a euphemism for accounting practices that tend to manipulate the rules of standard accounting practices or the spirit of those values. They are characterized by dubious complications and use of ‘novel’ ways of presenting income, assets and liabilities.
There are many reports of price manipulation, profit overstatement, and accounts falsification by some dubious stewards which rendered the financial statements ineffective. The business failures of the past decade however, have been closely associated with corporate governance failure which involves a number of parties, management board of directors, auditors, and some investors. (Ezeani 2010)
Financial statements in Nigeria have greatly violated all known ethical standards of the accounting and auditing profession. Previous studies on creative accounting such as Sen and Inanga (2010); Domash (2012); Amat, Blake and Dowds (2013) have focused mainly on the impact of creative accounting on investors’ decision in the stock market without highlighting the reasons for such practices. More so, the studies are of foreign origin whose findings may not be compatible with the Nigerian situation considering environmental differences. The few available studies in Nigeria such as Osisoma and Enahoro (2009), Aremu and Bello (2009), Akenbor and Ibanichuka (2012) did not pay particular attention to creative accounting practices on the reported profit of Nigerian firms. Aremu and Akenbor concentrated their works on the banking industry. Based on the above, the point of departure is to fill these existing gaps and to provide an empirical investigation of creative accounting practices on the reported profit of Nigerian firms. Warfield, T., Wild, J. & Wild, K., (2015).
1.3 Objectives of the Study
The main objective of this study is to assess the effect of creative accounting practice on the reported profit of Nigerian firms. Specifically, this study intends to:
- To Determine how the practice of creative accounting affects the quality of financial statements in Nigeria.
- Examine the number of ways creative accounting can be done and its solutions so that the effect may be minimized.
- Ascertain whether a well-designed framework of accounting regulation will curb accounting practices in reporting information in financial statements.
1.4 Research Questions
- To what extent does a creative accounting practice affect the quality of financial statements in Nigeria?
- How can the effects of creative accounting practices be minimized by examining the ways it is practiced and its solutions?
- To what extent will a well-designed framework of accounting regulation curb creative accounting practices in financial statement reporting?
1.5 Research Hypotheses
Hypothesis One
H0: Creative accounting practice does not have a great effect on the quality of financial statements.
H1: Creative accounting practice has a great effect on the quality of financial statements.
Hypothesis Two
H0: The effect of creative accounting practices cannot be minimized by examining the ways it is practiced and proffering solutions.
H1: The effect of creative accounting practices can be minimized by examining the ways it is practiced and proffering solutions.
Hypothesis Three
H0: A well designed framework of accounting regulation will not curb creative accounting practices in financial statement reporting.
H1: A well designed framework of accounting regulation will curb creative accounting practices in financial statement reporting.
1.6 Scope of the Study
This work is limited to the assessment of the effect of creative accounting practices on the reported profit of Nigerian firms in Abuja. The researcher only limited the search to this area not because other firms are not important.
1.7 Significance of the Study
Creative Accounting is a contemporary issue which is also a necessary requirement in any economy threatened by economic and political crises. The theme is a step towards research and supply of solutions for a series of issues that the accounting system is confronted with regarding the use of creative accounting.
Accounting seems the main supplier of information required for the decisional process, due to its systematic, homogenous character and the diversity of information it provides. Its objective is to present information on the financial state, performance and changes of the financial position of an economic entity. In some cases, this is not carried out.
There is no doubt that the application of the suggestions put forward in this work will go a long way in bringing about positive change to any organization that adheres to them, as well as act as an eye opener to the following users of accounting information:
Investors: Financial statements inflate the performance of companies by manipulating figures. If stamped out, it will enable them to distinguish between the paper entrepreneur and the truly successful entrepreneur. Investors will also be aware of those companies whose financial statements do not depict the reality of the financial position and will not invest in them so as not to lose their resources. In summary, this study intends to warn investors in general that taking a company’s financial statements at face value can be a recipe for disaster.
Creditors: This study will enable creditors know how to make rational investment, credit and similar decisions. It will guide them on how to study information in the financial statements with reasonable diligence.
Providers of Resources to Such Entities: For example, suppliers, lenders, tax payers or donors. Since their cash flows are related to enterprise cash flows, financial statements should provide information to enable them assess the amounts. This study will serve as a guide to these providers on assessing the amounts, timing and uncertainty of prospective cash receipts from sales, redemption, or maturity of securities or loans.
Representatives of Groups: Such as voters or shareholders. These set of people are unable to require, or contract for the preparation of special reports to meet their specific information needs. They only depend on the financial reports given to them by the entity. This study will enable them detect when the company’s figures are being manipulated and when the statements are true and fair.
Analysts and Members of the Media: Concerned with analyzing and reporting the performance of entities. This study will show these analysts the areas to concentrate on when assessing any entity’s compliance with legislation, regulations, common law and contractual arrangements, as these relate to the assessment of the reporting entity’s financial and service performance, financial position and cash flows. It will also enable them to choose whether to provide resources to the firm or keep doing business with them.
1.8 Definition of Terms
- Creative Accounting: the transformation of financial accounting figures from what they actually are to what the preparer desires by taking advantage of the existing rules and/or ignoring some or all of them.
- Financial Statements: formal records of the financial activities of firms.
- Aggressive Accounting: a forceful and intentional choice and application of accounting principles done in an effort to achieve desired results, typically higher current earnings, whether the practices followed are in accordance with GAAP or not (John Wiley and Sons 2002).
- Earnings Management: the active manipulation of earnings toward a predetermined target, which may be set by management, a forecast made by analysts, or an amount that is consistent with a smoother, more sustainable earnings stream. (John Wiley and Sons 2002)
- Corporate Governance: the system of structures, rights, duties, and obligations by which corporations are directed and controlled.
- Manipulation: change figures to suit one’s purpose or advantage.
- Creative Accounting Practices: any and all steps used to play the financial numbers game, including the aggressive choice and application of accounting principles, fraudulent financial reporting, and any steps taken towards earnings management.
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Appendices|FORMAT: Microsoft Word| PRICE: N5000| BUY NOW |DELIVERY
TIME: Within 24hrs. For more details Chatt with us on WHATSAPP @ https://wa.me/2348055730284
