CREATIVE ACCOUNTING AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Financial statements are prepared with the fundamental purpose of presenting a true and fair view of an organization's financial position and performance, so that shareholders, investors, regulators and other stakeholders can make informed decisions. Creative accounting, however, refers to the range of practices through which managers, while technically remaining within the bounds of accounting standards and regulation, exercise discretion in the recognition, measurement or presentation of financial figures in ways that depart from the underlying spirit of those standards, typically with the aim of presenting a more favourable picture of financial performance than the underlying economic reality would otherwise support. Agency theory, as articulated by Jensen and Meckling (1976), offers a useful lens for understanding why such practices arise: where managers, as agents, possess more detailed knowledge of a firm's true financial condition than shareholders and other principals, an information asymmetry emerges that can create both the opportunity and the incentive for managers to manipulate reported figures in pursuit of their own interests, whether these relate to bonus targets, job security, or the maintenance of share price and investor confidence.

Within Nigeria's banking sector, a sector that has undergone repeated waves of regulatory reform, recapitalization and consolidation, concerns about creative accounting have proven particularly persistent. Sanusi and Izedonmi (2014), in an early study of Nigerian commercial banks, found that practices such as income smoothing and inventory manipulation had a strong and significant relationship with shareholders' wealth as measured by return on equity, indicating that such practices, whatever their ethical standing, do have a measurable financial effect. Muritala, Osemene and Olawale (2014), examining creative accounting and bank performance more broadly within the Nigerian banking sector, similarly found evidence linking creative accounting techniques to variations in financial performance outcomes. More recent evidence continues to reinforce these findings and to extend them using more sophisticated analytical techniques: Oyewobi and Omorogbe (2024), using panel regression analysis of listed deposit money banks, found that indicators associated with creative accounting practices exert a statistically significant effect on banks' return on equity, while Adebayo and Olanipekun (2025), analysing data from listed deposit money banks in Nigeria between 2015 and 2024, found that higher discretionary accruals, a common proxy for creative accounting, were associated with significantly lower profitability as measured by both return on assets and earnings per share, underscoring that aggressive earnings management can ultimately undermine, rather than enhance, a bank's true financial health.

Taken together, this body of evidence points to creative accounting as a practice of considerable and continuing relevance to the Nigerian banking sector, one capable of affecting not only the financial performance metrics that are the traditional focus of accounting research, but potentially also non-financial dimensions of organizational performance, such as reputation, stakeholder trust and regulatory standing, though the correlation between these financial and non-financial effects has received comparatively less systematic attention. It is against this background that the present study examines creative accounting and the financial performance of deposit money banks in Nigeria, with particular attention to both the financial and non-financial dimensions of performance and the relationship between them.

1.2 Statement of the Problem

Despite regulatory reforms aimed at improving financial reporting quality in the Nigerian banking sector, including the adoption of International Financial Reporting Standards, cases of creative accounting continue to be uncovered within Nigerian deposit money banks, prompting regulatory investigations and, in some instances, changes in bank leadership. Where such practices go undetected or unaddressed, they pose a risk not only to the immediate financial performance of the banks involved, as reflected in metrics such as return on assets and earnings per share, but also to broader, non-financial dimensions of organizational standing, including investor confidence, regulatory trust and public perception of the banking sector's stability. While a number of studies have examined the relationship between specific creative accounting techniques and financial performance measures in isolation (Sanusi & Izedonmi, 2014; Oyewobi & Omorogbe, 2024; Adebayo & Olanipekun, 2025), comparatively less attention has been paid to creative accounting's effect on non-financial performance, or to the extent to which any relationship exists between creative accounting's effect on financial and non-financial performance within the same set of banks. It is this gap that the present study seeks to address.

1.3 Objectives of the Study

The broad objective of the study is to examine creative accounting and financial performance of deposit money banks in Nigeria, while the specific objectives are to:

• Ascertain the contribution of creative accounting on non-financial performance of banks in Nigeria.

• Establish the contribution of creative accounting on financial performance of banks in Nigeria.

• Evaluate the correlation between creative accounting's contribution on non-financial and financial performance of banks in Nigeria.

1.4 Research Questions

In line with the objectives above, this study seeks to answer the following research questions:

• What is the contribution of creative accounting to the non-financial performance of deposit money banks in Nigeria?

• What is the contribution of creative accounting to the financial performance of deposit money banks in Nigeria?

• What is the correlation between creative accounting's contribution to non-financial performance and its contribution to financial performance of deposit money banks in Nigeria?

1.5 Research Hypotheses

The study is guided by the following null hypotheses:

• Ho1: Creative accounting has no significant contribution to the non-financial performance of deposit money banks in Nigeria.

• Ho2: Creative accounting has no significant contribution to the financial performance of deposit money banks in Nigeria.

• Ho3: There is no significant correlation between creative accounting's contribution to non-financial performance and its contribution to financial performance of deposit money banks in Nigeria.

1.6 Significance of the Study

This study is significant to regulators, including the Central Bank of Nigeria and the Financial Reporting Council, as its findings will provide additional, up-to-date evidence on the extent to which creative accounting practices affect both the financial and non-financial performance of deposit money banks, evidence that can inform the design of stronger regulatory and disclosure requirements. To bank executives, auditors and compliance officers, the study underscores the potential costs, both financial and reputational, of aggressive earnings management, reinforcing the case for stronger internal controls.

To investors and shareholders, the study offers insight into how creative accounting practices might distort the financial picture presented to them, insight that can inform more cautious and better-informed investment decisions. For the academic community, the study extends and connects strands of the existing literature, including the work of Sanusi and Izedonmi (2014), Muritala et al. (2014), Oyewobi and Omorogbe (2024) and Adebayo and Olanipekun (2025), by explicitly examining the correlation between creative accounting's financial and non-financial effects, an area that has received comparatively limited direct empirical attention. Finally, the study will serve as a useful reference for future researchers, students and practitioners interested in creative accounting and bank performance in Nigeria.

1.7 Scope of the Study

This study is focused on deposit money banks operating in Nigeria, with particular reference to those listed on the Nigerian Exchange Group. The scope of the study covers an examination of the contribution of creative accounting practices to both the financial performance of these banks, typically measured through indicators such as return on assets, return on equity and earnings per share, and their non-financial performance, encompassing dimensions such as reputation, stakeholder trust and regulatory standing, together with an evaluation of the correlation between these two dimensions of performance. The study does not extend to non-bank financial institutions or to deposit money banks operating outside Nigeria.

1.8 Limitations of the Study

This study is subject to a number of limitations typical of research in this area. Data relating to creative accounting practices are, by their nature, not always transparently disclosed in published financial statements, requiring the use of proxy measures, such as discretionary accruals, which, while widely used in the literature, may not capture every dimension of creative accounting practice. Measuring non-financial performance is similarly challenging, as it often relies on perceptual or survey-based data that may be subject to respondent bias. The study is also limited by the availability and consistency of audited financial data across the sampled banks over the period under review, and time and resource constraints associated with the research further limited the number of banks and the depth of analysis that could be undertaken. Notwithstanding these limitations, the study was designed to provide as rigorous and representative an analysis as possible within the given constraints.

1.9 Definition of Terms

Creative Accounting: The use of accounting techniques that, while technically compliant with accounting standards and regulations, are employed to present a more favourable picture of an organization's financial position or performance than the underlying economic reality would otherwise support.

Financial Performance: The measurable outcomes of an organization's financial activities, typically assessed through indicators such as return on assets, return on equity, earnings per share and profitability.

Non-Financial Performance: Aspects of organizational performance not directly captured in financial statements, such as reputation, stakeholder trust, customer satisfaction and regulatory standing.

Deposit Money Bank (DMB): A financial institution licensed to accept deposits from the public and provide other banking services, forming the core of a country's commercial banking sector.

Earnings Management: The deliberate use of accounting choices or operating decisions to influence reported earnings toward a desired outcome.

Discretionary Accruals: The component of a firm's total accruals that arises from managerial discretion or judgment, as opposed to normal business operations, and is often used as a proxy for earnings management.

REFERENCES

Adebayo, C. O., & Olanipekun, C. T. (2025). Creative accounting practices and financial performance of deposit money banks in Nigeria. FUOYE Journal of Accounting and Management Sciences, 8(1).

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Muritala, T. A., Osemene, O. F., & Olawale, A. A. (2014). Creative accounting and bank performance: Evidence from Nigerian banking sector. Journal of Management and Accounting, 10(8), 165–180.

Oyewobi, I. A., & Omorogbe, O. D. (2024). Effect of creative accounting on the financial performance of listed deposit money banks in Nigeria. International Journal of Research and Innovation in Social Science, 8(3), 464–476.

Sanusi, B., & Izedonmi, P. F. (2014). Nigerian commercial banks and creative accounting practices. Journal of Mathematical Finance, 4(2), 207–218.