The Effect of Creative Accounting on Stakeholders’ Wealth

Effect of Creative Accounting on Stakeholders’ Wealth

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The current business environment and even more economic recession, have in recent times pushed the top management of many organizations into paying attention to how to make the financial statements of their organizations look better to attract investors by manipulating figures in their financial statement either by increasing or decreasing the figures depending on what they want to achieve at the moment using aggressive or creative accounting otherwise known as financial statement fraud (Anumaka, 2007). In recent times, fraud has been discovered to pose a big threat to organizations. It is a big risk which can incur a very big cost leading to a lot of problems of which on other problem s is loss of confidence of shareholders and the public. This research tries to find a solution to financial statement fraud. Another area which the research work will focus on is “auditor” involvement in solving creative accounting problems. The researcher will also look into corporate governance as a tool in fraud detection and prevention. According to Osisioma and Enahoro (2006), accounting processes and choice of policies resulting from many judgments at the same time are capable of manipulation, which have resulted in creative accounting. The differences which are observed in financial reporting are legitimately prepared from a choice of varied accounting policies of the same organization for the same period, which has brought about challenges of credibility to accounting (financial statements and reporting).

1.2 STATEMENT OF THE PROBLEM

Creative accounting and earnings 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 the 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 several parties, the 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 Enron, World Com, Parmalat, Tyco, etc. have cost not only billions of dollars to the stakeholders but also have damaged the accounting profession as a result of the financial misrepresentation. 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 the 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

To achieve the above research objectives for the paper, the following research questions will serve as a 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 the 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 the share prices of an organization.

1.6 SIGNIFICANCE OF THE STUDY

The study will be of great benefit to policymakers, management of various organizations, auditors, shareholders, and student researchers. The study will enable managers to 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 the 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 with data collection due to the reluctance of the respondents to provide information on time.

1.8 DEFINITION 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 the 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.