Effects of Creative Accounting on Shareholders’ Wealth in Nigeria Non-manufacturing Companies
CHAPTER ONE
Research Objective
The objective of this research was to establish the effect of creative accounting practices on shareholders’ wealth of non-manufacturing companies listed at the NSE in Nigeria.
- To establish the effect of income smoothing on shareholders’ wealth of non-manufacturing companies listed at the NSE in Nigeria.
- To determine the effect of accelerated depreciation on shareholders’ wealth of non-manufacturing companies listed at the NSE in Nigeria.
- To state the effect of tax avoidance on shareholders’ wealth of non-manufacturing companies listed at the NSE in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Conceptual review
Concept of Creative Accounting
The word creative accounting is seen as misleading accounting, it is often used to describe the accounting procedures that allow firms to declare erroneous financial outcomes of their company activities (Akenbor & Ibanichuka, 2012). Creative accounting refers to the use of accounting knowledge to influence the reported figures, whereas 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 the stakeholders (Yadav, 2014). Bankole, et al. (2018) also described Creative accounting as accounting methods that respects the text or regulations of regular accounting practices but surely vary from the spirit of those rules. Creative accounting procedures are different from fraudulent practices and hence are not illegal but immoral in terms of misguiding investors. Michael (2011) noted that the wider US meaning sees creative accounting as including fraud whereas the UK definition sees creative accounting as leveraging the flexibility within the accounting system, but excludes fraud. Conclusively, this thesis would therefore look at methods of applying creative accounting like increase income, decrease expenses, increased Assets, decreased liability, use of provisions accounting, inventory, increase in operating cash flow, and adjustments or being generous with bad debt to distort the information to be presented in the financial statements.
Different authors have expressed their views about what creative accounting means to them. According to Haruna & Emmanuel (2017), Creative accounting is also known as “Earning management” and could be referred to in accounting practices as the acts that follow the letter of rules of standard accounting practices but certainly deviate from the spirit of those rules. Creative accounting practices are different from fraudulent accounting practices and thus are not illegal but immoral in terms of misguiding investors. The practices, which are followed in manipulating the books, are duly authorized by the accounting system and thus cannot be considered as a violation of any rule or regulations. It is characterized by excessive compliance and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations of desired results.
Jaward & Xia (2021) defined creative accounting as “the process through which the accounting specialists use their knowledge in order to manipulate the figures included in the annual accounts.” In other words, Ijeoma & Aronu (2013) referred to it as the aggressive use of choices available under accounting rules, to present the most fattening view of a company possibly in its financial statement. According to them, it involves the pushing of accounting principles to the limits of their flexibility or even beyond so as to improve their annual statements. Also, it refers to accounting techniques in which financial information is distorted and manipulated in order to present a better financial picture by either increasing or decreasing the profit as the case may be, by giving a misleading appearance of the capital size or structure and by concealing relevant information from existing and potential investors (Idris, Kehinde, Ajemunigbohun & Gabriel, 2012).
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter contains the research design, population, sample design, data collection methods and data analysis.
Research Design
Sanders, (2009) defines research design as a distinct strategy and investigation of a phenomenon adopted to obtain answers to research questions. It is a program of what the researcher will do based on the intended method of data collection and constraints that the researcher will have.
This study used a diverse research design. Specifically, cross-sectional and explanatory research designs was adopted for primary data and time-series for collecting secondary data. According to Caruth (2013), a mixed research design guarantees richer insights into the phenomenon of the study. Hence information that may be missed out if only one type of design is used will be captured. This study therefore adopted mixed research design to ensure that the data collected and analyzed addresses the objectives of the study.
According to Coopers et al. (2007), a cross-sectional design should be intended to collect data once over the same period of time, analyze then report on it. Explanatory research was effectively used in this research, to test hypotheses by measuring relationships between the independent (creative accounting) and dependent (Shareholders’ wealth) variables given that data was analyzed using statistical techniques. Time series was used to collect secondary data from corporate annual reports of the firms filed with Capital Markets Authority in the Nigeria Stock Exchange booklet.
CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND INTERPRETATION
Introduction
This chapter contains data analysis and interpretation of findings. The objective of this study was to examine the effects of creative accounting on shareholders wealth in selected non-manufacturing companies in Oyo state, Nigeria. The findings were presented as follow:
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter tends to give the summary of the results in this study, conclusions and recommendations for practice and areas for further research.
Conclusion
The objective of this study was to examine the effects of creative accounting on shareholders wealth in selected non-manufacturing companies in Oyo state, Nigeria. From the analysis of the specific individual involved in the implementation of creative accounting it was found that most of the sampled respondents were accountants. Most of the sampled respondents agreed that their organizations have a depreciation policy applicable their non-current assets while some of the respondents have no information on whether their organizations have a depreciation policy with most confirming that their organizations follow depreciation policy strictly, moderately and very strictly after every 3 years and 9 years with some after every 2 years and 6 years subsequently.
The results also revealed that their organizations use stable dividend policy when distributing their profits to shareholder while some organizations use constant payout policy and residual dividend policy. Some of the organizations rarely change their dividend payout policy while other organizations often and very often change their dividend payout policy between 3 years and 5 years. This study also found that changing dividend policy it’s not necessary.
From the results it’s clear that most of the sampled respondents revealed that their organizations do change their bad debts provision between 6 years and 8 years while some of the respondents do change their bad debts provision policy between 3 years and 5 years respectively. The results showed that most organizations do change their earnings percentage between 6 years and 8 years and 3 years and 5 years respectively.
Recommendation
Local investors should embrace shareholder value concept as an excellent model for value creation. This is to increase insider trading meant to boost investor confidence and sense of security as guaranteed by mutual interests in growth in shareholder value. However, there have been alerts to investors regarding reduced earnings and even losses hence minimizing chances for disbursement of dividends or bonus. This is due to a combination of deteriorating macroeconomic environment and unique challenges attributed to certain firms.
The watchdogs of the accounting profession in the country should be strict on the creative accounting issues. Several non-manufacturing companies in Oyo state, Nigeria are reportedly faced with allegations of massive fraud and creative accounting. This trend must now more than ever ensure that financial statements are sternly scrutinized.
Suggestions for Further Study
The scope of the current study was limited to the responses of managers and accountants of listed non-manufacturing companies in Oyo state, Nigeria. Future research could expand other employees who could be practicing creative accounting.
Further, new creative accounting practices may emerge in the future due to changes in regulations, managerial policy and new technologies. Researchers must continue their efforts to identify such emerging issues.
Also, there is need to look into other variables that are affected by creative accounting practices and indirectly affecting shareholders wealth. Further, multivariate statistical analysis should be conducted to identify variables which may have mediating and/ or moderating effects in the relationship between the determinants of shareholders wealth. Further research will shed more light on the long-term implications of creative accounting and its effect on shareholders wealth.
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