CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to International Accounting Standard Board (IASB, 2007 a), for users of financial report to make economic decisions, financial reports must provide useful information. This information can only be useful if it fulfills basic qualitative characteristics of financial statements. The International Accounting Standard Board (IASB, 2007b) Framework emphasizes that relevant financial information should be predictive or confirmatory in nature. This should be such that the financial information of a specific entity will be considered material when its omission influences economic decision of its users. The managers are entrusted to require, take care and grow the shareholders’ wealth. Salome, (2012), explains that information or data asymmetry creates agency conflict between management and shareholders as explained the agency theory. Accountants, who are stewards of shareholders, collaborate with administrators in manipulating accounting figures instead of showing the real and honest view of financial accounts. A need therefore arises to spot creative accounting practices, how they are practiced, as well as looking at the effect they have on shareholders’ wealth. In step with Maria et al., (2013), the anticipations of a corporation changing into reality, an excellent ought to generate trust with associate correct image reinforces a sense that such a corporation active transparency is safe. The liberty of choices allowed by most accounting restrictive bodies are characterized by inadequacy of accounting laws, their heterogeneous and therefore the evolving method of harmonization encourage a rise in inventive accounting practices. They also emphasized that creative accounting and fraud are practiced when enterprises face financial difficulties and are motivated by the desire to deceive. These practices will disappear only with the fading of their primary causes. The accounting regulators in charge of limiting practices of creative accounting should consider circumstances that allow its practices. There are people who are trying to minimize the impact on the system set up despite the number of standards and frameworks set up by the accounting profession. Studies carried out internationally and locally indicate the existence of creative accounting in companies. Ozkaya,(2014) studied creative accounting practices in the Turkish government specifically in the public sector. These practices manifested in hidden debts affecting IMF’s stabilization program forecasts. Ogiedu and Odia,(2013) stated that in Nigeria the creative accounting practices are prevalent and attributed to bad corporate governance. Salome,(2012) studied strategies used by accountants in Nigeria to practice creative accounting and found out that they use profit eroding mechanisms which lead to drastic consequences like corporate scandals and collapse both international and locally as in the case of WorldCom and Enron. In Nigeria, there are companies that over-report their financial performance to meet targets and please ever demanding shareholders. This highlights the existence of creative accounting. According to Kamau et al., (2012), this trend has now more than ever ensures that financial statements are sternly scrutinized. Nyabuti et al.,(2015), discovered robust association between the variables (creative accounting and financial performance) among listed companies in Nigeria. Most companies use creative accounting practices abusively.
1.2 STATEMENT OF THE PROBLEM
Creative accounting and earning management are euphemisms for accounting practices that tend to circumvent, albeit, cleverly, or 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 or liabilities.
There are many reports of price manipulation, profit overstatement, and accounts falsification by some dubious stewards which rendered the financial reporting 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).
Most business organizations have always been connected with fraud and have always been affected by financial collapses. Recently, accounting scandals like Enran, World Com, Parmalat, Tyco, etc. have cost not only billions of dollarsto the stakeholders but also have damaged the accounting profession as a result of financial mis-representation.
Most of the standards set for the accounting (Audit) report have been eroded.
1.3 OBJECTIVES OF THE STUDY
The main aim of the study is to examine the effect of creative accounting on shareholders wealth. Specific objectives of the study are:
1. To establish the relationship between creative accounting and shareholders wealth.
2. To ascertain whether creative accounting practices significantly affect shareholders investment decisions.
3. To examine the effect of creative accounting on share prices of an organization and shareholders’ dividends.
4. To ascertain whether a well designed framework of accounting regulation will curb creative accounting practice in corporate financial reporting
1.4 RESEARCH QUESTIONS
In order to achieve the above research objectives for the paper, the following research questions will serve as guide:
1. What relationship exists between creative accounting and shareholders wealth?
2. Do creative accounting practices significantly affect shareholders investment decisions?
3. What effects do creative accounting have on share prices of an organization and shareholders’ dividends?
4. To what extent will a well designed framework of accounting regulation curb creative accounting practice in corporate financial reporting?
1.5 RESEARCH HYPOTHESIS
1. Ho: There is no significant relationship between creative accounting and shareholders wealth.
2. Ho: Creative accounting does not affect shareholders investment decisions.
3. Ho: There is no significant relationship between creative accounting and share prices of an organization.
1.6 SIGNIFICANCE OF THE STUDY
The study will be of great benefit to policy makers, management of various organizations, auditors, shareholders and student researchers. The study will enable managers have an in-depth understanding of the effects and costs of window dressing financial statements. It will also benefit investors, shareholders and the public who may resort to audited financial state of organizations to take investment decisions. It will also be readily available for academic consumption.
1.7 LIMITATIONS OF THE STUDY
The research study was carried out under a tight schedule. It was undertaken within a short time and was carried out intermittently with lectures and private studies.
There was also a problem of data collection due to reluctance on the respondents to provide information on time.
1.8 DEIFINITION OF TERMS
Creative Accounting: accounting practices that deviate from standard accounting practices.
Fraud: An intentional deception to cause a person to give up property or some legal right, which could also mean deceit trickery or cheating.
Financial Statement: A yearly book that contains summarized information of the firm’s affairs organized systematically.
Auditor: A person assigned to carry out an independent examination of evidence supporting the financial statement of an organization.
Shareholders Wealth: shareholder wealth is the collective wealth conferred on shareholders through their investment in a company
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