EFFECTIVE OF CREATIVE ACCOUNTING ON SHAREHOLDERS WEALTH IN A MANUFACTURING FIRM
1.1 Background of the Study
Globally, for users of financial report to make economic decisions, financial reports must provide useful information (Ezeani, Ogbonna & Ezemoyih, 2012). This information can only be useful if it fulfills basic qualitative characteristics of financial statements (Amat & Gowthorpe, 2010). The International Accounting Standard Board (IASB, 2009) Framework emphasizes that relevant financial information should be predictive or confirmatory in nature. This should be such that the financial information of a specific entity was considered material when its omission influences economic decision of its users.
Sawabe (2009) emphasized the innovative aspects of creating accounting in maneuvering accounting numbers and argued that innovation is an essential part of creative accounting practices involved in innovative accounting practices. The managers are entrusted to take care and grow the shareholders‟ wealth. Salome, (2012), explains that information asymmetry creates agency conflict between management and shareholders as explained the agency theory. Accountants, who are stewards of shareholders, collaborate with directors in manipulating accounting figures rather than showing a true and fair view of financial accounts. A need therefore arises to identify creative accounting practices, how they are practiced, as well as looking at the effect they have on shareholders’ wealth.
According to Gherai and Balaciu(2011), the anticipations of a company becoming reality, a great need to generate trust with an accurate image reinforces a feeling that such a company practicing transparency is safe. The freedom of decisions allowed by most accounting regulatory bodies are characterized by inadequacy of accounting regulations, their heterogeneity and the evolving process of harmonization encourage an increase in creative accounting practices. They also emphasized that creative accounting and fraud are practiced when enterprises face financial difficulties and are motivated by the desire to deceive. These practices disappeared only with the fading of their primary causes.
Simser (2008) elucidates that taxpayers are required to pay taxes based on accounting and legal advice provided which should be aligned to the firm’s financial reports and the existing tax rules. Taxation is complex and exploring the tax system requires the guidance of skilled lawyers, accountants and other advisors. Tax evasion is unacceptable and/or illegal while tax avoidance is perfectly acceptable however there is no clear line between the two. This is the dilemma that is faced by the advisors. Tax evasion is perpetrated through acts such as presenting incorrect statement of accounts, making false entries or alterations, or false books or records, destruction of books or records, concealment of assets or covering up sources of income constitute tax evasion (Malkawi, and Haloush, 2008).
Ozkaya, (2014) studied creative accounting practices in the Turkish government specifically in the public sector. These practices manifested in hidden debts affecting IMF‟s stabilization programme forecasts. Odia and Ogiedu(2013) stated that in Nigeria the creative accounting practices are prevalent and attributed to bad corporate governance. Salome, (2012) studied strategies used by accountants in Nigeria to practice creative accounting and found out that they use profit eroding mechanisms which lead to drastic consequences like corporate scandals and collapse both international and locally as in the case of WorldCom and Enron. In Nigeria, there are companies that over-report their Shareholders wealth to meet targets and please ever demanding shareholders. This highlights the existence of creative accounting. According to Kamau et al., (2012), this trend has now more than ever ensures that financial statements are sternly scrutinized. Kotter (2008), discovered robust association between the variables (creative accounting and Shareholders wealth) among listed companies in Nigeria. Most companies use creative accounting practices abusively.
Shah, (2011) explained creative accounting as the intentional influence exerted on financial reported figures to suit the impression of managers to stakeholders by a view other than the actual performance or financial position of the company by applying accounting knowledge and discretion within the jurisdiction of laws set up by accounting regulatory bodies.
Practices of creative accounting has facilitated many companies beyond financial crises than put them into crisis. The fault when it emerges lies with the user of the financial information. A study carried in India by Shah et al., (2011) clearly showed how creative accounting was used to by companies producing cement during financial crises in the country. Many companies used the creative accounting techniques to remain afloat. Companies showed profits or minimized losses by change of depreciation policy when demand and production of cement was low. This kept investors reasonably comforted and staff relaxed by paying out dividends out of the profits. Shareholders‟ wealth was increased as per the reported profits. Even when demand and production increased they did not change the accounting policy.
With increasing hard economic times, companies may be motivated to practice creative accounting for diverse reasons. Players in the accounting profession may not fully understand the operations of creative accounting because different companies practice creative accounting for different reasons. Carrying out research on the effect of creative accounting practices on shareholders wealth of audit firms in Nigeriahelped the players in accounting profession to empirically understand the implications of such practices on shareholders wealth of firms in Nigeria
It is upon this backdrop that the study intends to find out whether such practices as tax avoidance, accelerated depreciation, and income smoothing as part of the major creative accounting practices have an influence on the shareholders wealth of selected auditors in Nigeria.