CREATIVE ACCOUNTING AND ITS EFFECTS ON THE FUTURE OF THE COMPANY ABSTRACT
Creative accounting has emerged and developed consequent upon the managers wish to present a certain financial image of an entity in the financial statements. It complies with the accounting rules and regulation which makes it different from fraud.
Falsification of corporate data has gone viral and every 6 among 10 companies are guilty of this practice that is how egregious and viral it has grown. This is not an applaudable stance it should be curbed because it puts the investors at risk by exposing them to untrue financial Reports.
100 respondents were chosen from the population;thesum of 100 questionnaires was distributed and 100 were collected giving a 100% response rate.the one sample t-test and the chi-square test were used to test the hypothesis formulated. The data generated were analyzed using simple percentage and accurate presentation of the demographic questions.
Among the findings was that Creative accounting exists in published financial statement and annual reports of companies in Nigeria and the practice is considered by many of the stakeholders especially the Regulatory agencies as unacceptable and meant to delude or take advantages of ignorant users who usually are unable to detect such practices in the financial reports of these companies. The consequence of this is that the investors loose trust in the records in the financial statement and they are indifferent as to whether to take the records the way it is presented or give it further scrutiny. It is recommended that there is an urgent need for Adoption of one set of global financial reporting standards known as International financial Reporting standard which must be embraced by all operators of accounts or those performing an accounting duty and they should be carefully monitored to ensure that there is no deviation from the standard and any one guilty of that should be brought to books.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background of the study - - - - -
Problem of the study - - - - -
Research Questions - - - - -
hypotheses - - - - -
Objective of the study - - - - -
Scope of the study - - - - - -
Significance of the study. - - - - -
References- - - - - -
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - -
2.2 conceptual framework - - - - - -
2.2.1 Importance of Creative Accounting - - - -
2.2.2 Factorsthat influences the performance of creative accounting -
2.2.3 Reasons for Creative Accounting - - - -
2.2.4Ways a company can improve its earnings. - - -
2.2.5 Effects of creative accounting. - - - -
2.2.6 Why boost the statement of financial position? -
2.2.7Techniques of creative accounting - - - -
.2.2.8Other nomenclatures of creative accounting - - -
2.2.9Terms related to Creative Accounting.- - - -
2.2.10 Common labels for financial number games. - - -
2.2.11It is not all about wrong practice - - - -
2.2.12The secrets of creative accounting - - - -
2.2.13Creative Accounting vs Fraud - - - -
2.2.14Experience from the world - - - - -
2.2.15 Possible role of corporate Governance in Creative Accounting -
2.2.16 Information needs of investors - - - -
2.2.17 Investors and financial reporting - - -
2.2.18 The impact of Creative Accounting - - -
2.2.19 Ways of limiting creative accounting. - - -
2.3 Theoretical framework - - - -
2.3.1 Agency theory - - - - - - -
2.3.2 Information theory.- - - - - - -
2.3.3 Ethical theory - - - - - -
References - - - - - - -
CHAPTER THREE: METHODOLOGY
Introduction - - - - - - -
Research Design - - - - - -
Population and sample. - - - - - - -
Sources of Data - - - - - -
3.5 Data Analysis Technique - - - - - -
References. - - - - - - -
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA.
4.1. Introduction - - - - - -
4.2. Data Description - - - - - - -
4.2.1 Responses from close ended questions - - -
4.2.2 Responses from open ended questions - - - -
4.2.3 test of research hypotheses - - - - -
4.2.4 Answers to research questions. - - - - -
4.3 Discussion of Result - - - - -
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION.
5.1 Introduction - - - - - - -
5.2 Summary of findings - - - - - - -
5.3 Recommendation. - - - - - -
5.4 Conclusion - - - - - -
Bibliography - - - - - -
Appendices - - - - - -
1.1 Background to the study
According to Business Dictionary, Accounting is defined as the systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.Accounting provides information on the resources available to a firm,the meansemployed to finance those resources, and the results achieved through their use.Companies generally prefer to report a steady trend of growth in profit rather than to show volatile profits with a series of dramatic rises and falls. This is achieved by making unnecessarily high provisions for liabilities and against asset values in good years so that these provisions can be reduced, thereby improving reported profits, in bad years. They also want to 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. This helps the company to raise capital from new share issues, offer their own shares in takeover bids, and resist takeover by other companies. All these can be achieved with the practice of creative accounting.
The term 'creative accounting' can be defined in a number of ways. Initially we will offer thisdefinition: 'a process whereby accountants use their knowledge of accounting rules tomanipulate the figures included in the annual Financial statement, taking advantage of the possibility of interpreting the rules and of the existence of numerous options in solving various accounting problems (F.C Dima).Creative Accounting involves the repetitive selection of accounting measurement or reporting rules in a particular pattern, the effect of which is to report a stream of income with a smaller variation from trend than would otherwise have appeared. (Copeland, 1968)Creative accounting is a euphemism referring to those different types of accounting practices that may correlate with the standard accounting practices but certainly deviate from the main intent of those rules. They are characterized by excessive compilation and the use of novel ways of characterizing income, assets or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms “innovative” or “aggressive” are also sometimes used. This flexibility gives room for manipulation, deceit and misrepresentation. Hence, the accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business.
Also according to investopedia creative accounting is Accounting practices that follow required laws and regulations, but deviate from what those standards intends to accomplish. Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company. Although creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviors. A final definition of the term is, ' the transformation of financial accounting figures from what they actually are to what prepares desire by taking advantage of the existing rules and/or ignoring some or all of them' (Kamel Nasser 1993). The general idea behind this concept is that financial information is manipulated to represent a financial position and performance, that does not reflect its true position and performance.Creative accounting seeks to inflate stock prices, for example by selling assets at the end of a year to create a profit that offset a loss. One could have a standpoint that creative accounting disguises the company’s true financial statement, but unlike ‘Aggressive accounting’ which is the practice of incorrectly recognizing revenue in order to please investors, creative accounting is generally legal.A company is a legal entity, allowed by legislation, which permits a group of people, as shareholders, to apply to the government for an independent organization to be created, which can then focus on pursuing set objectives, and empowered with legal rights which are usually only reserved for individuals, such as to sue and be sued, own property, hire employees or loan and borrow money.
Creative accounting is more than just a profit changing. The various methodsof creative accounting according to Amat, Blake and Dowds (1999) include:
Sometimes the accounting rules allow a company to choose betweendifferent, methods e.g.A company can choose the accounting policy that givestheir preferred image.
Certain entries in the accounts involve an unavoidable degree of estimation,judgment, and prediction.
Artificial transactions can be entered into both to manipulate balance sheetamounts and to move profits between accounting periods.
Genuine transactions can be timed so as to give the desired impression in theaccounts.
Thus, creative accounting has come to include: conceal financial risk,circumvent borrowing restrictions, escape shareholder control, boost reported profitsor minimize reported losses, manipulate key ratios used in market analysis, enhancemanagement performance and gain access to finance that would otherwise be impossible toraise.One should be able to see that if creative accounting is practiced byany organization there is plenty of scope of maneuvering and manipulation of theaccounting information. Such manipulation might leave the shareholders, public, thegovernment and any interested party absolutely confused as to what are facts andwhat is not real and true regarding a published set of accounting statements.Creative accounting could be bad, but that does not mean that it must be bad. If creative accounting coheres with ethical and legal standard as well as the generally accepted accounting standard (GAAP), they can yield great benefits to the company and its shareholders. The problem of ‘creative accounting’ starts when the business is led by people who focus on short-term and short-sighted profits when they perceive the accounting as a necessary evil and a tool they could meddle with at their own will to earn more advantage for themselves. It is ‘creative’ mainly because it is a creative way of assembling procedures in order to change the profit, by increasing or decreasing figures from what they actually are to what they wish to achieve by taking advantage of the existing rules and/or ignoring some or all of them.
However, one can firmly assert that creative accounting is referred to asincome smoothing, earnings management, earning smoothing, financial engineeringand cosmetic accounting as perceived by the USA and Europe. The commonopinion of the authors is that the creative accounting is expressed by windowdressing and reporting profits and assets in a way that is complimentary to thecompanies’ shareholders and investors. So, apart from its wide usage as a way ofbeing fraudulent, it is seen by most authorities as been deceitful and undesirable because of misleading information.
1.2 Problem of the Study
The idea behind creative accounting practices is often to emphasize the positive aspects of the company’s financial situation, while downplaying any negative factors. To an extent, accounting irregularities of this type can be misleading to potential investors, and thus are often considered to be unethical, even though the strategy may remain within the letter of the law.
As with most types of misrepresentation, the most effective examples of creative accounting are the ones that tell a portion of the truth, but downplay any elements that could alter the perception that the company wishes to convey to others. For example, a company may play up the fact that it recently experienced significantly increased sales during the last quarter. At the same time, little is said about the fact that expenses increased in proportion to that jump in sales, effectively offsetting that extra sales volume. If those who hear about the increase in sales do not probe a little deeper, the perception is likely to be that the company is now financially stronger, when in fact the business has achieved little to no growth at all.
Most business organizations have always been connected with fraud andhave always been affected by financial collapses. Recently, accounting scandals likeEnran, World Com, Parmalat, Tyco, etc. have cost not only billions of dollars to them stakeholders but also have damaged the accounting profession as a result offinancial mis-representation.
1.3 Research questions.
What is the extent of acceptability of Creative Accounting?
To what extent can the disadvantages of Creative Accounting be said to outnumber the advantages.
What is the possible effect of the practice of creative accounting on the future of the company?
Ho1¬: creative accounting is not an acceptable practice to a high extent.
Ho2: The disadvantages of creative accounting do not outnumber the advantages by far.
Ho3: Creative Accounting does not have a negative effect on the future of the company.
1.5 Objective of the Study
The main objective of this study is to determine the effect of creative accounting on the future of the business. Specifically, the study intends to:
Find out the extent of acceptability of creative accounting.
Determine if the disadvantages of the practice far outnumber the advantages.
Ascertain the possible effect of the practice of creative accounting on the future of the company
1.6 Scope of the Study
The scope of this study is not limited in case studies in question rather, it extends and covers every other company that has the duty of preparing and presenting financial statement to the various users for decision making.
1.7 Significance of the Study
The study would be relevant to the users of financial information to the extent that It would show the effect that the creative accounting practices have on the financial statement and would help them make decisions on whether to rely fully on the details of the financial statement that was presented to them or not.
Copeland R. M (1968) “Enhancing public confidence in the accounting profession” journal of Accountancy, July. P 7683.
F.C Dima (2012) “Creative accounting through the Policies and Accounting options”, Annals.Economic science series.Timisoara, Vol XVIII- Supplement/ 2012 p180.
Ifeanyi,Chuks, Ezeani,andOkonje (2012) the effect of creative accounting on the job performance of Accountants (Auditors) in reporting financial statement in Nigeria.
International conference in Business and economics research (2011) IPEDR Vol. 16 (2011) © IACS II Press Singapore
Download the complete project material