FIRM CHARACTERISTICS AND CREATIVE ACCOUNTING IN NIGERIAN QUOTED COMPANIES
ABSTRACT
The study examined the effect of firm characteristics on creative accounting in Nigerian Quoted companies. Creative accounting is the use of accounting knowledge to influence the reported figures, while remaining within the jurisdiction of accounting rules and laws instead of showing the actual performance.
The research design employed in this study is correlation analysis and descriptive statistics. The population of the study is the entire one hundred and seventy five (175) quoted companies listed on the floor of Nigerian Stock Exchange (NSE) as at December 31, 2017. A total number of forty (40) companies were drawn from the following sectors manufacturing, agriculture, building/materials, and food/beverages period for the 2013 to 2017. This sectors and firms were selected on the basis of availability of data and convenience. The study relied on secondary data which was derived from the financial statements of the sampled companies.
The results showed that, Firm Performance (FPERF) has no significant effect on creative accounting proxied by discretionary accrual. However, it was found that leverage has no significant effect on discretionary accrual in Nigerian firms and also firm size has no significant effect on discretionary accruals in Nigerian firms.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1    Background to the Study -    -    -    -    -    -    -
1.2    Statement of the Research Problem    -    -    -    -    -    
1.3    Research Questions    -    -    -    -    -    -    -
1.4    Objectives of the Study    -    -    -    -    -    
1.5    Research Hypotheses    -    -    -    -    -    -    -    
1.6    Significance of the study    -    -    -    -    -    
1.7    Scope of the Study    -    -    -    -    -    -    -    
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction    -    -    -    -    -    -    -    
2.2    Conceptual Review    -    -    -    -    -    -    
2.2.    1 Creative Accounting    -    -    -    -        -    
2.2.2   Firm Characteristics    -    -    -    -    -    -    -
2.2.2.1 Firm performance       -    -    -    -    -    -    -
2.2.2.2     Firm Size    -    -    -    -    -    -    -    
2.2.2.3 Financial Leverage    -    -    -    -    -    -    
2.3 Review of Prior Studies    -    -    -    -    -    -
2.4Theoritical Review    -    -    -    -    -    -
2.4.1 Agency Theory    -    -    -    -    -    -    -    -
2.4.2 Stakeholders Theory    -    -    -    -    
2.4.3   Information Asymmetry Theory-    -    -    -    
2.4.4   Signaling Theory    -    -    -    -    -
2.4.5   Positive Accounting Theory    -    -    -    
2.4.6   Resource Dependency Theory    -    -    -    -
2.4.7   Ethical Theory    -    -    -    -    -    -
2.5      Chapter Summary    -    -    -    -    -
CHAPTER THREE: METHODOLOGY     
3.1    Introduction     -    -    -    -    -    -    
3.2    Research Design    -    -    -    -    -    -
3.3    Population of the study    -    -    -    -    -
3.4    Sampling and Sampling Technique    -    -    -    -    
3.5    Sources of Data    -    -    -    -    -    
3.6    Method of Data Analysis -    -    -    -    -    -    
3.7    Diagnostics Tests    -    -        -    -    -    
3.8    Model Specification    -    -    -    -    -    -    -
3.9    Measurement of Variables    -    -    -    -    -    
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS
4.1    Introduction    -    -        -    -    -    -
4.2       Presentation of Results    -    -    -    -    -    -    
4.2.1    Descriptive Statistics    -    -    -    -    -    -    
4.2.2    Correlation Analysis     -    -    -    -    -    -    
4.3    Panel Regression Analysis    -    -    -    -    -    -
4.4     Discussion of Findings    -    -    -    -    -    
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1    Introduction        -    -    -    -    -    -    
5.2    Summary of Findings        -    -    -    -    -    
5.3    Conclusion    -    -    -    -    -    -    -    -
5.4    Recommendations    -    -    -    -    -    -    -
Bibliography     -    -    -    -    -    -    -    
Appendix I    -    -    -    -    -    -    -    -
    Appendix II    -    -    -    -    -    -    
CHAPTER ONE
INTRODUCTION
1.1    Background tothe Study
Business organizations are the live wire of any society desirous of advancement, prosperity and social development. The importance of corporations to any given society particularly a capitalist society cannot be overemphasized. The world over, corporations have played a critical role in fast tracking development through absorbing personnel’s into the workforce thereby elevating their living conditions and quality of life. For this reason, firms as an entity rely on the technicality and expertise of standardized accounting practices in line with the international approved standards (Nzotta, 2008) in order for profit maximization, robustive returns on investment to shareholders, fulfillment of its corporate social responsibility and the fast tracking of development and growth of the society as a whole. Phrased alternatively, the efficiency and effectiveness of a firm’s success is largely dependent on the accounting practices employed by the corporation in question.
Since creative accounting often does not violate legal rules, the question is whether it is good or bad. This depends on the basic purpose for which it is used and the manner in which it is applied. Bhasin (2016) describes it in a very picturesque way: creative accounting is like a double-edged sword – management can either use it in a positive sense, or it can abuse it. Thus the idea to present the business in a better light can ultimately result in total loss of company image. The use of creativity in financial reporting can be described as playing with the elements of financial statements. Doing so may result in overestimation of the value of assets, high inventory levels, reduction in expenditures, changes in depreciation methods, showing provisions as assets, etc. (Shahid & Ali, 2016).
However, well-intented changes in accounting standards often result in opening up of new opportunities for accounting manipulations. Although companies apply accounting standards, at the same time they use “loopholes” to enhance the key indicators Karim, A. M., Shaikh, J. M., Hock, O.Y., & Islam, M. R. (2016).
In Nigeria many firms have assumed a critical role in furthering developmental drive and aspirations since independence. This notwithstanding,in other scenarios some firms have equally assumed a role that is in contrast with the stated objectives of each administration (Afolabi & Oluseye 2013). For this reason, government at various times have come up with policy initiatives aimed at mitigating the dexterous effects and consequences that these actions might have on the citizenry. This is significant because the erstwhile accounting practices in Nigeria was open to manipulations, attentions and fraudulent constellations with the resultant effect of massive downsizing, the plummeting of stock market prices and the dismissal of managerial boards as these companies grinded to a halt (Nzotta, 2008). At the turn of the 21st century the Nigerian government came up with a policy that required companies to adopt the International Financial reporting standards (IFRS) in line with global best practices in order to block the loopholes associated with falsified practice in accounting report (Nwanyanwu, 2010)
Moghri and Galogah (2013) asserted that creative accounting involves conscious action taken by management to achieve specific objectives in the framework of accounting procedures. Sometimes words like “cosmetics” or “earnings” “management” are also used for describing creative accounting. Creative accounting is a term which is used to mean systematic misrepresentation of the true and fair income, liabilities and assets of corporations or organizations. The increase of financial reporting fraud has caused concerns about the quality of financial reporting and has reduced accounting credits (Biddke, Hilary & Verdi, 2009).
According to Yadav (2013), asserted that creative accounting refers to accounting practices that may not follow the rules of accounting standards practices but certainly deviate from those rules and regulations. These practices are characterized by excessive compilation and the use of novel ways of charactering income, assets or liabilities. This results in financial reports that are not all dull but have all the complication of a novel, hence the name “creative”. Creative accounting has led to a number of recent accounting scandals e.g. Cadbury Nigeria Plc, Oceanic Bank, FCMB capital market international Bank Plcetc., and many proposals for accounting reform that centered on an updated analysis of capital and factors of production that would correctly reflect how value is added (Osisioma & Enahor, 2006). Financial reports influence investors behavior with respect to portfolio selection, which in turn affects security prices and therefore the term on which a firm obtains additional financing (Chen, Hope, Li & Wang, 2010).
Apart from investors, standard setters, regulators and policy makers have vital interests in the effect of financial reporting on the economy. This interest is due to the economic consequences associated with the financial information. Creative accounting, income smoothing, earnings management, cosmetic accounting financial engineering and aggressive accounting are the financial reporting gimmicks used to moderate company’s financial reports to encourage investors to buy the company’s stocks to increase the firms market value (Mulford&Comiskey, 2002). In the USA and Europe creative accounting practices in financial reporting have been termed as the art of manipulating the statement of financial position and statement of comprehensive income. The common opinion of researchers is that creative accounting is expressed by window dressing and reporting profits and assets in a way that is complementary to the companies’ shareholders and investors desire (Yadav, 2013).
More so, apart from its widely use as a way of being fraudulent; it is seen by most authorities as been deceitful and an undesirable practice of generating misleading information (Stolowy& Breton, 2003). In recent times, corporate earnings raised concerns among financial market regulators, operators, investors and academic researchers about whether the appropriateness of the financial reports and disclosures are fairly presented in all material respect of the issuer in order to boost the public confidence in financial disclosure.
Griffiths (1995) observes that, every company in the country is fiddling its profits, implying that every set of published accounts is based on the books which have been gently cooked or completely fabricated. The figures which are fact twice a year to the investing public have all been changed in order to protect the guilty.
    Financial accounting reporting became necessary with the obvious need for accountability and stewardship from the managers to whom investors entrusted their financial resources. Financial reporting is a duty stewardship assigned to the directors of a company by section 334 of the company and Allied matters Act 2004 as amended; equally the mandatory responsibility of companies to keep accounting records derives its strength from section 331 and 382 of the same act.
The primary objective of financial reporting quality is to provide high quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making (IASB, 2008). Providing high quality financial accounting reporting is important because it will positively influence capital providers and other stakeholders in making investment, credit, and similar resource allocation decisions enhancing overall market efficiency (IASB, 2008). Despite a considerable interest in the effectiveness of accounting standards on the quality of financial reporting empirical literature emerged that offers contradictory findings about the question to what extent accounting standards contribute to the decision usefulness of financial reporting information.
1.2 Statement of the Problem
    Accounting represents the livewire that determines the performance of any firm. Globally, many entities have gone down the drain as a result of creative accounting and this even more prominent in developing countries like Nigeria.According to Ijeoma and Aronu (2013) creative accounting is the aggressive use of choices available under accounting rules to present the most fattening view of a company in its financial statement. According to them, it involves the pushing of principles of accounting to the limits of their flexibility in order to improve their annual statements.Thus, creative accounting as the literature suggests has over the years been a tool for manipulating annual reports among a wide range of firms and across sectors.
    The credibility and quality of annual reports of companies across the globe and Nigeria particularly, has become a question to consider as a result of recent corporate accounting scandal (Badawi, 2008, Enofe, 2010). These recent corporate financial scandals constitute a great challenge to the truthfulness and value relevance of the financial reports and earnings quality by firms. In Nigeria, corporate scandals related to earnings manipulation and financial misstatements such as the cases of Cadbury Nigeria Plc and African Petroleum plc (Okolie&Agboma, 2008); Wema Bank, Nampak, Finbank and Spring Bank(Adeyemi&Fagbemi, 2010) and more recently,Intercontinental Bank Plc, Bank PHB; Oceanic Bank Plcand AfribankPlcare known publicly reported cases that resulted in misguiding financial reports.
1.3 Research Questions
    In this study the following questions were attempted
1.    What is the influence of firm performance on creative accounting proxy by discretionary accruals in Nigerian quoted companies?
2.    To what extent does firm size influence creative accounting proxy by discretionary accruals in Nigerian quoted companies?
3.    What is the impact of financial leverage on creative accounting proxy by discretionary accruals in Nigerian quoted companies?
1.4Objectives of the Study
    The specific objectives of the study were to;
1.    Examine the influence of firm performance on creative accounting in Nigerian quoted companies.
2.    Ascertain the effect of firm size on creative accounting in Nigerian quoted companies.
3.    Investigate the relationship between financial leverage and creative accounting in Nigerian quoted companies.
1.5 Research Hypotheses
    To answer the research questions and achieve the objectives highlighted above the following hypotheses were formulated and stated in the null form.
1.    There is no significant relationship between firm performance and creative accounting in Nigerian quoted companies.
2.    There is no significant relationship between firm size and creative accounting in Nigerian quoted companies.
3.    There is no significant relationshipbetween financial leverage and creative accounting in Nigerian quoted companies.
1.6 Significance of the Study
    This research is significant for several reasons and among these reasons, is to provide useful contributions to the academic work already done by researchers is the subject area and be of immense importance to future researchers which may be interested in the subject area. Furthermore, the findings of the study will also be useful to regulators such as the Financial Reporting Council (FRC), the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) amongst others as it will strengthen their understanding of the sensitivity of financial reporting quality to specific variables. Additionally, the study will equally be useful in stimulating public discuss or debate giving the depth of empirical research from emerging economies in this area. Lastly, the study is expected to provide useful information to investors management of firms and business analyst since this era of adverse economic conditions require more sophisticated techniques of creative accounting in other to make reliable and concrete decisions on critical issues.
1.7 Scope of the Study
    The focus of this study is to examine the relationship between firm characteristics and creative accounting in Nigerian companies. This study covers all the companies quoted on the floor of the Nigerian stock Exchange (NSE) from 2013-2017.
1.8 Definition of Terms
Firm: For the purpose of this study, a firm refers to any business organization or entity.
Accounting: Accounting refers to the process of identifying, measuring, recording and communicating economic transactions (Oxford Dictionary of Accounting 2005).
Creative Accounting: The Oxford Dictionary of Accounting 2005 defines creative accounting as a misleadingly optimistic form of accounting, as an accounting practice that is designed to circumvent or manipulate financial reports yet it is not illegal but immoral in terms of misguiding investors.