EFFECT OF CREATIVE ACCOUNTING ON STAKEHOLDER’S WEALTH CHAPTER ONE INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The current business environment and even more economic recession, have in recent times pushed the top management of many organizations into paying attention to how to make the financial statements of their organizations look better in order to attract investors by manipulating figures in their financial statement either by increasing or decreasing the figures depending on what they want to achieve at the moment using aggressive or creative accounting otherwise known as financial statement fraud (Anumaka, 2007). In recent times, fraud has been discovered to pose a big threat on organizations. It is a big risk which can incur a very big cost leading to a lot of problems of which on other problem s is loss of confidence of shareholders and the public. This research tries to find solution to financial statement fraud. Another area which the research work will focus on is ‘’auditor involvement in solving creative accounting problems. The researcher will also look into corporate governance as a tool in fraud detection and prevention. According to Osisioma and Enahoro (2006), accounting processes and choice of policies resulting from many judgments at the same time are capable of manipulation, which have resulted in creative accounting. The differences which are observed in financial reporting are legitimately prepared from choice of varied accounting polices of the same organization for the same period, has brought about challenges of credibility to accounting (finically statements and reporting).
1.2 STATEMENT OF THE PROBLEM
Creative accounting and earning management are euphemisms for accounting practices that tend to circumvent, albeit, cleverly, or manipulate the rules of standard accounting practices or the spirit of those values. They are characterized by dubious complications and use of ‘novel’ ways of presenting income, assets or liabilities. There are many reports of price manipulation, profit overstatement, and accounts falsification by some dubious stewards which rendered the financial reporting ineffective. The business failures of the past decade however, have been closely associated with corporate governance failure which involves a number of parties, management board of directors, auditors and some investors (Ezeani, 2010). Most business organizations have always been connected with fraud and have always been affected by financial collapses. Recently, accounting scandals like Enran, World Com, Parmalat, Tyco, etc. have cost not only billions of dollarsto the stakeholders but also have damaged the accounting profession as a result of financial mis-representation. Most of the standards set for the accounting (Audit) report have been eroded.
1.3 OBJECTIVES OF THE STUDY
The main aim of the study is to examine the effect of creative accounting on shareholders wealth. Specific objectives of the study are:
1. To establish the relationship between creative accounting and shareholders wealth.
2. To ascertain whether creative accounting practices significantly affect shareholders investment decisions.
3. To examine the effect of creative accounting on share prices of an organization and shareholders’ dividends.
4. To ascertain whether a well designed framework of accounting regulation will curb creative accounting practice in corporate financial reporting
1.4 RESEARCH QUESTIONS
In order to achieve the above research objectives for the paper, the following research questions will serve as guide:
1. What relationship exists between creative accounting and shareholders wealth?
2. Do creative accounting practices significantly affect shareholders investment decisions?
3. What effects do creative accounting have on share prices of an organization and shareholders’ dividends?
4. To what extent will a well designed framework of accounting regulation curb creative accounting practice in corporate financial reporting?
.