EFFECT OF CREATIVE ACCOUNTING ON STAKEHOLDERS WEALTH
CHAPTER ONE
INTRODUCTION
1.1 THE STUDY’S BACKGROUND
The current business environment, and even more so the economic recession, have recently pushed the top management of many organizations to pay attention to how to make their organizations’ financial statements look better to attract investors by manipulating figures in their financial statements either by increasing or decreasing the figures depending on what they want to achieve at the time using aggressive or creative accounting otherwise known as financial accounting (Anumaka, 2007).
Fraud has recently been discovered to be a significant threat to organizations. It is a significant risk that can result in significant costs, causing a slew of issues, one of which is a loss of confidence among shareholders and the general public. This study seeks a solution to financial statement fraud.
Another focus of the research will be “auditor” involvement in creative accounting problem solving. In addition, the researcher will investigate corporate governance as a tool for fraud detection and prevention.
Accounting processes and policy decisions resulting from multiple judgments at the same time, according to Osisioma and Enahoro (2006), are manipulable, resulting in creative accounting. The differences in financial reporting are legitimately prepared from a se
lection of different accounting policies of the same organization for the same period, which has resulted in credibility challenges to accounting (financial statements and reporting).
1.2 THE PROBLEM’S STATEMENT
Accounting practices that circumvent, albeit cleverly, or manipulate the rules of standard accounting practices or the spirit of those values are referred to as creative accounting and earnings management. They are distinguished by questionable complications and the use of ‘novel’ methods of presenting income, assets, or liabilities.
There have been numerous reports of price manipulation, profit overstatement, and account falsification by some questionable stewards, rendering financial reporting ineffective.
However, business failures over the last decade have been closely linked to corporate governance failure, which involves several parties, including the management board of directors, auditors, and some investors (Ezeani, 2010).
Most businesses have always been associated with fraud and have been impacted by financial collapses. Accounting scandals such as Enron, World Com, Parmalat, Tyco, and others have recently cost not only billions of dollars to stakeholders but have also harmed the accounting profession as a result of financial misrepresentation. The majority of the accounting (Audit) report standards have been eroded.
1.3 THE STUDY’S OBJECTIVES
The study’s primary goal is to investigate the impact of creative accounting on shareholder wealth. The following are the study’s specific objectives:
2. Determine whether innovative accounting practices have a significant impact on shareholders’ investment decisions.
3. To investigate the impact of creative accounting on an organization’s share price and dividends paid to shareholders.
4. Determine whether a well-designed accounting regulatory framework will limit creative accounting practices in corporate financial reporting.
1.4 QUESTIONS FOR RESEARCH
The following research questions will serve as a guide to achieving the above research objectives for the paper:
1. What is the connection between creative accounting and shareholder wealth?
2. Do innovative accounting practices have a significant impact on the investment decisions of shareholders?
3. What impact does creative accounting have on an organization’s share price and dividends paid to shareholders?
4. To what extent will a well-designed accounting regulatory framework limit creative accounting practice in corporate financial reporting?
1.5 HYPOTHESIS OF RESEARCH
1. Ho: There is no statistically significant link between creative accounting and shareholder wealth.
2. Ho: Creative accounting has no effect on the investment decisions of shareholders.
3. Ho: There is no significant relationship between creative accounting and an organization’s share price.
1.6 THE STUDY’S SIGNIFICANCE
Policymakers, management of various organizations, auditors, shareholders, and student researchers will all benefit greatly from the study.
The study will provide managers with a thorough understanding of the effects and costs of financial statement window dressing. It will also benefit investors, shareholders, and the general public, who may rely on organizations’ audited financial statements to make investment decisions. It will also be easily accessible for academic use.
1.7 THE STUDY’S LIMITATIONS
The research study was completed on a tight timeline. It was completed in a short period of time and was interspersed with lectures and private studies. Data collection was also hampered by respondents’ unwillingness to provide information on time.
1.8 TERM DEFINITION
Accounting practices that deviate from standard accounting practices are referred to as creative accounting.
Fraud: An intentional deception intended to induce a person to give up property or a legal right, also known as deception, trickery, or cheating.
A financial statement is a yearly book that contains summarized information about the firm’s operations that is organized systematically.
Auditor: A person tasked with conducting an independent examination of the evidence supporting an organization’s financial statements.
Shareholder Wealth: Shareholder wealth refers to the aggregate wealth conferred on shareholders as a result of their investment in a company.
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