CREATIVE ACCOUNTING AND CORPORATE FAILURE (A STUDY OF NIGERIAN BANKS)

CREATIVE ACCOUNTING AND CORPORATE FAILURE (A STUDY OF NIGERIAN BANKS)

CHAPTER ONE

INTRODUCTION

1.1       Background of the study

Over the years, there have been several cases of accounting and business scandals around the world which had attracted criticisms on the quality of the information provided by the corporate entities. Although, there are existing strong accounting standards (GAAP and IAS) to guide financial accounting activities, sometimes it becomes impossible to prevent the manipulative behaviour of financial statement preparers, who want to affect the decisions of the users of financial statements in favour of their companies. (Haruna & Emmanuel, 2017)

These manipulative behaviours of figures in accounting reporting are often called “creative accounting”. In reality, financial accounting reports are produced to show the true and fair view of the financial positions of reporting entities in order to help stakeholders in making appropriate decisions, however, current accounting practices which allow different policies and professional judgments are being manipulated to boost the companies’ present image at the expense of the information provided to the users and the future of the corporate entities (Haruna & Emmanuel, 2017).

Failure is a concept widely defined and understood differently depending on the area of weakness and inability of businesses to achieve set goals or inability to meet societal, industrial or even government expectation of organizations. When there is failure its effect cuts across all human endeavours and professions, hence the need to place this important construct on the front burner for discuss. Regarding entrepreneurs, Gulst and Maritz (2019) define failure as deviation from the entrepreneur’s desired expectations. This definition builds relativity inside the concept; failure becomes an interpretation as oppose to a fact.

In fact, “doctoring of financial information” has now become a severe menace globally and it is so endemic that it is gradually becoming a normal way of life. As a result of this, the initial decades of the new millennium have been marked by some highly publicized corporate failure and even more cases of financial fraud and deceit (Adrian et al., 2019). The public has witnessed a number of well-known examples of accounting scandals and bankruptcy in both developed and developing countries involving large and prominent companies such as Sunbeam, Kmart, Enron, Global Crossing (USA), BCCI, Maxwell, Polly Peck (UK), HIH Insurance (Australia) PT Bank Bali, and Sinar Mas Group (Indonesia), Bangkok Bank of Commerce (Thailand), United Engineers Bhd (Malaysia), Samsung Electronics and Hyundai (Korea) etc. (Anis, 2019)

Several research studies have examined the issue of motivations for creative accounting behaviour. According to Balaciu and Cosmina (2018), the managers are interested in paying less tax and dividends, the shareholders in receiving higher dividends, the employees in obtaining better salary and higher profit share, while the government wants higher taxes and so on. These conflicting interests are often argued to be the motivations for creative accounting practices. Amat, et al (2015) also note that creative accounting may help maintain or boost the share price both by reducing the apparent levels of borrowing, so making the company appear subject to less risk, and by creating the appearance of a good profit trend. Informational perspective is another key element underpinning the study of the creative accounting phenomenon. A conflict is said to be created by the information asymmetry (privilege to certain information) that exists in complex corporate structures between a privileged management and a more remote body of stakeholders (Okoye and Alao, 2018).

Particularly in Nigeria, the cases of creative accounting are on the increase as more corporate bodies in Nigeria are being investigated. The corporate failures of most Nigerian bank Chief Executive Officers and investigations into their activities by the Antigraft agency, Economic and Financial Crimes Commission (EFCC) are largely due to fraudulent financial reporting (Ijeoma, 2014). In 2019, the Central bank of Nigeria (CBN) sacked five (5) Bank managing directors and Executive Directors for mismanagement and alleged fraud. This has affected the stability and growth of the Nigerian financial system since some of the said banks are no longer operational; Intercontinental Bank, Oceanic Bank, and Fin Bank. It is therefore arguable that the practice of creative accounting is inimical to the continual growth of the Nigerian financial system. In 2013, the House of Representatives Committee on Finance accused commercial banks in the country of sundry sharp practices, including tax evasion, non-remittance of government revenue and outright falsification of their accounts (Ijeoma, 2014). In a report released on the 25th of August 2013, the committee said it had uncovered a lot of discrepancies in the data submitted to it by the banks including the outright refusal to present documentary evidence of revenue remittances, blank violations of existing laws, self exemption from existing rules, false declaration and manipulation of financial information. Preliminary findings showed that the published audited accounts of some banks were at variance with the figures the banks submitted to the committee during an investigation (Ijeoma, 2014).

These events have certainly served to help erode the public’s confidence in the financial reporting of corporate entities in Nigeria and raised the question of whether or not creative accounting has a higher probability to cause serious corporate failure. Hence, this study will examine the reasons for and effect of creative accounting practices on corporate entities in Nigeria. In light of the findings from this study, measures to curb such practice will be suggested.

 

1.2       Statement of the problem

The several corporate scandals all over the world since the year 2010 to date have brought to bear the fact that many companies‟ earnings are the aftermath of accounting gimmicks and shenanigans. According to Osazevbaru (2012), this discovery has not only cast doubt on the integrity of preparers of accounting reports, but has also led to the loss of confidence in those who are supposed to check business namely; auditors, analysts, and government regulators. The loss of public confidence in financial reporting has affected negatively the investment interest of potential investors, thereby affecting the performance of securities markets.

According to Munene (2014), there are companies that engage in creative accounting, over-reporting their financial performance to meet targets and please ever demanding shareholders. Manipulation in financial reports benefits only in the short-run hence susceptibility to future corporate collapse and scandals. The managers pursue personal interest at the expense of shareholders. They propose huge perks, make defective decisions of investment or participate in creative accounting and fraud. This takes no notice of the fact that shareholders may be willing to examine the behavior of management (Lekaram, 2014).

Creative accounting practice in Nigeria appears to be increasing as many corporate bodies are being investigated. The case of Cadbury Nigeria Plc was due to the doctoring of accounts to cover up certain inadequacies or some bad deals perpetrated by management. The corporate failures of most Nigeria companies today and especially the arrest of some banks Chief Executive Officers by the Economic and Financial Crimes Commission (EFCC), were blamed on fraudulent financial reporting, which has affected the reputation of the accounting profession and the stability of the financial system. Creative accounting practices have been increasing in recent years in the Nigerian firms for the sake of attracting unsuspecting investors or obtain undeserved accounting-based rewards by presenting an exaggerated misleading or deceptive state of financial affairs. It is evident that the extent of window-dressing of organizations‟ financial statements in Nigeria has greatly violated all known ethical standards of the accounting and auditing profession which needs to be investigated.

Several authors have tried to investigate the concept of creative accounting and the various techniques used by management to manipulate financial statements (Akenbor et al., 2012; Osazevbaru, 2012; and Akpanuko et al., 2017). However, the impact of creative accounting practices on the audit of financial statements and the consequent effect on corporate failure has not been given much attention. Based on the above, our study will be among the few studies to look at creative accounting and corporate failures in the Nigerian financial reporting, focusing on selected organizations in the Nigerian Stock Exchange.

 

1.3       Aim and Objectives of the study

The aim of the study is to examine the impact of creative accounting on corporate failure.

The specific objectives of this study are to:

1. Ascertain the contribution of creative accounting on non-financial performance of banks in Nigeria.
2. Establish the contribution of creative accounting on financial performance of banks in Nigeria.
3. To evaluate the correlation between creative accounting contribution on non-financial and financial performance of banks in Nigeria

 

1.4    Research Question.

The following questions were posed to assist in the study.

1. What is the contribution of creative accounting on the financial and non-financial performance of banks in Nigeria?
2. To what extent does contribution of creative accounting differ on the financial and nonfinancial performance of banks in Nigeria?
3. To what extent does creative accounting contribution in non-financial performance correlate with that of financial performance in banks in Nigeria?

 

1.5    Hypotheses of the Study

The following null hypotheses were stated for empirical testing.

H_O1: Creative accounting has no significant contribution on non-financial performance of banks in Nigeria.

H_O2: Creative accounting does not have significant contribution on financial performance of banks in Nigeria.

H_O3: There is no significant correlation in the contribution of Creative accounting on the non-financial and financial performance of banks in Nigeria.

 

1.6       Significance of the study

The significance of this research can be viewed from two major standpoints – practical and academic.

1. Practical Significance: This study will assist in broadening the knowledge of the following:

Auditors: With the increasing litigations against auditors, it has become imperative for auditors to be aware of certain techniques which may be used by unscrupulous management to manipulate their financial statements. This study will bring to the awareness of auditors, certain creative accounting techniques that are used to manipulate the financial statements being audited by them. It will also provide a guide on critical audit areas that required special attention during the audit of the financial statements. Furthermore, the study will help them know whether book entries are used as creative accounting techniques and how such techniques affect audit work.

Managers: Managers often engage in manipulative accounting unconsciously due to the flexibility in the choice of accounting methods often allowed by accounting standards. Financial directors had in time past, been penalized for engaging in the manipulative accounting and as a result lost their jobs. This study will guide firms’ management on the need to ensure that accounting standards are adhered to and to ensure that necessary disclosures in respect of the accounting methods used should be contained in the financial statements.

Other stakeholders: The conflict of interest of the firm’s stakeholders has been a major reason why financial statements are often manipulated. Management, in a bid to meet the conflicting interests of the firm’s stakeholders often present financial statements that portray good performance. This study will assist the various stakeholders to be well guided in using the financial statements to make investment decisions and other vital decisions. Specifically, it will assist current and potential investors to make informed decision about investing in quoted companies.

b. Academic Significance

In academia, this study will prove to be significant in the following ways:

1. It will contribute to the enrichment of literature on creative accounting, the concept of corporate risk and corporate failure.
2. It will explain further the relationship, causative and ordinary, between corporate failure and creative accounting.

• It will suggest ways, based on empirical findings, by which creative accounting practices, through the use of book entries, can be detected to prevent their impact, if any, on corporate failure.

1. Finally, this study will serve as a reference point for other researchers.