CREATIVE ACCOUNTING AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA
Many accounting and business scandals that have occurred throughout the years have drawn attention to the accuracy of the information given by corporate organizations across the globe. The financial statements of the firm did not adequately depict the company’s financial status, according to the report of the creative accounting scandal at African Petroleum PLC (Oyejide&Soyibo, 2001). Similarly, a Cadbury Nigeria Plc accounting issue in November 2006 produced more concerns than it did answers concerning creative accounting (Itsueli, 2006). The Nigerian banking sector has seen an increase in creative accounting practices in recent years to draw unwary investors or earn unjustified accounting-based incentives by portraying an overstated, misleading, or deceptive condition of the bank’s financial affairs (Sanusi&Izedonmi 2013). The problem that caused Diamond Bank to fail in 2017 and 2018 is not implausible.
The practice of “creative accounting,” or falsifying financial reports, is dishonest, risky, and unethical. The legitimacy of the accounting and auditing roles is being threatened by the rising problem of creative accounting. The issue of creative accounting is not new, but in the 1980s it was one of the major issues in corporate finance and corporate governance (Merchant &Rocknes 1994). The intricacy of its techniques and terminology have expanded globally, and by the early 1990s, national and international authorities had firmly established creative accounting as one of their top issues in financial reporting. Hence, “Creative Accounting” is the phrase that is used the most commonly both in the USA and abroad, but “Earnings Management” is a word that is regularly used in Europe. Creative accounting is also known as income smoothing, earnings smoothing, cosmetic accounting, financial crafts, or accounting crafts in other writings. Ironkwe and Umobong (2017) Innovative accounting practices have led to the collapse of several firms and enormous financial losses for shareholders and other investors.
Freddie Mac, Enron, Worldcom, Parmalat, American Insurance Group (AIG), Victoria (2014), and other significant firms were all involved in accounting scandals that included fraud, irregularities, and serious misstatements (Odoh&Udeh 2009). The existence of creative accounting and its detrimental impact on the credibility of financial reporting and firm survival have been seen in the corporate environment of Nigeria. These stakeholders base many of their significant choices on financial information taken from the financial accounts (Susmus&Demirhan, 2013). Hence, for these individuals to make the right judgments, their correctness and dependability are essential.
The fall of Enron in 2001 made this reality more significant, and its significance increased with the current financial crisis as a result of the failure of significant financial institutions. In Nigeria, the Cadbury case revealed a huge overstatement of the company’s financial situation over a number of years. The situation is similar but equally unpalatable in the United States, where Enron, which grew to be the seventh-largest firm in the country in only 15 years, went out of business when it was found that it had been faking its profits (Amatorio, 2005).
While it should stray from the spirit of accepted accounting principles, creative accounting should adhere to the letter of the law. Asuquo (2011) asserts that they are distinguished by excessive complexity, the employment of creative methods to describe income, assets, or obligations, and the aim to sway readers’ opinions. Sometimes, the words “innovative” or “aggressive” are employed. The financial statement is undoubtedly the most significant and valuable document for all users, but particularly for shareholders or investors who are making decisions. They may learn vital information about the efficiency of the firm from the financial statement itself. Yet, when revenue is purposefully and artificially smoothed, it may lead to insufficient or deceptive income disclosure (Ashari, Koh Tan & Wong, 1995). Shareholders and investors may not have enough information to assess the organization’s success as a result of creative accounting.
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