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Creative Accounting and Financial Performance of Deposit Money Banks in Nigeria


The rapid collapse of enterprises in the recent past has thrown doubt on the quality of accounting services provided by workers and the reliability and quality of work of auditors (internal and external). The study therefore evaluated creative accounting and financial performance of deposit money banks in Nigeria. The study adopted survey research design. Judgmental random sampling technique was employed to select four banks out of 21 deposit money banks in Nigeria. Primary data were collected from 60 respondents that were chosen through stratified random sampling technique. Descriptive statistics were used to analyze hypotheses one and two in which responses to the questionnaire in 5 points Likert Scale were clustered into two groups. Correlation technique was adopted in analysis of hypothesis three. The results of the analyses showed that creative accounting contributes significantly to non-financial and financial performance of banks in Nigeria. Also revealed was high correlation between contribution of creative accounting practices on financial and non-financial performance of banks. The research concludes that creative accounting negatively affects banks in Nigeria as decisions made based on the information so provided were deceptive hence the reports of corporate collapse as a result of such actions. The study recommends amongst others that Accountants in the employ of organizations with intent to indulge in creative accounting practice should resist and/or persuade the management by explaining in details the implications of engaging in the act as it is unethical and give misleading financial performance indication.




1.1       Background of the study

Over the years, there have been several cases of accounting and business scandals around the world which had attracted criticisms on the quality of the information provided by the corporate entities. Financial statements, the outputs of the accounting process, are the mediums by which both the internal and external stakeholders can gain an understanding about the financial performance of a firm. Many of the important decisions given by these stakeholders are based on financial data extracted from the financial statements (Susmus & Demirhan, 2013). Therefore, accuracy and reliability of them are crucial for these people in order to make appropriate decisions. This fact has become more important in recent years starting from 2001 by the collapse of Enron and its importance intensified with the recent financial crisis because of the bankruptcy of major financial institutions. To produce transparent, timely and reliable financial statements, accounting process should follow objective and consistent set of rules. Even if there exists strong accounting standards (GAAP and IAS) to guide financial accounting activities, sometimes it becomes impossible to prevent the manipulative behaviour of financial statement preparers, who wants to effect the decisions of the financial statement users in favour of their companies. Complexity and unpredictability of constantly changing environment makes it difficult to consider all possible situations in advance when setting standards. Even if the accounting standards cannot prevent manipulative behaviour in advance, they can curb it afterwards (Wang, 2008).


Creative accounting and earnings management are euphemisms referring to accounting practices that should follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of these rules. According to Asuquo (2011), they are characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms “innovative” or “aggressive” are sometimes used. Financial statement is arguably the most useful and important to all users especially for the shareholders or investors in decision-making process. Based on the financial statement itself, they can obtain useful information about the effectiveness of the organization. However, inadequate or misleading income disclosure may result when income is deliberately and artificially smoothed (Ashari, Koh Tan & Wong, 1995).  The effect of creative accounting may lead shareholders and investors to have inadequate information when evaluating the organization’s effectiveness. The Cadbury saga in Nigeria discovered a significant overstatement of its financial position over a number of years. The story is similar but also not palatable in the United States, where Enron which grew in just 15 years to be America’s seventh largest company went underground after it was discovered that the company has been fiddling with profit figure (Amatorio, 2005).

The idea of manipulating the financial report known as creative accounting is deceptive, dangerous and ethically wrong. Creative accounting is a growing issue of concern, threatening the credibility of both the accounting and auditing functions. While the problem of creative accounting is not new, it was one of the key themes in corporate finance and corporate governance in the 1980s (Merchant and Rocknes 1994). By the early 1990s, creative accounting was well and truly recognized by national and international regulators as one of their major challenges of financial reporting and it has developed geographically both in its practices’ complexity and in its nomenclature. Thus, the term used most frequently as well as in United States of America (USA) is “Creative Accounting,” whereas, in Europe the phrase “Earnings Management” is often used. In other literatures, creative accounting is referred to as Income Smoothing, Earnings Smoothing, Cosmetic Accounting or Accounting Cosmetics, Financial Crafts or Accounting Crafts. Umobong and Ironkwe (2017) Creative accounting activities have resulted in huge investment losses by shareholders and other investors and liquidation of many organizations. These losses arose from accounting scandals in form of fraud, irregularities and material misstatements that engulfed major corporations such as Enron, Worldcom, Parmalat, Freddie Mac, American Insurance Group (AIG), Victoria (2014) and (Odoh & Udeh 2009). In Nigerian corporate environment, the presence and negative effect of creative accounting on credibility of financial reporting and corporate survival has been experienced.

For example, report of creative accounting scandal in African Petroleum PLC revealed that financial statements of the company did not fairly present the company’s financial position (Oyejide & Soyibo, 2001). Similarly in November 2006, an accounting scandal in Cadbury Nigeria Plc also raised more questions than answer about creative accounting (Itsueli, 2006). Also, creative accounting practice has been increasing in recent years in the Nigerian banking industry to attract unsuspecting investors, or obtain undeserved accounting-based rewards by presenting an exaggerated misleading or deceptive state of bank financial affairs (Sanusi & Izedonmi 2013). The issue that led to the collapse of diamond bank in 2017/2018 is not farfetched.

The incessant corporate failures led to the adoption of Sarbanes – Oxley Act (2002) by USA in July, 2002. The Act applied to all public companies whose stocks are traded in USA and was designed to avoid serious accounting problems in the future. Therefore, good accounting standards that can limit the opportunistic discretion may result in accounting earnings that are more reflective of a company’s underlying economic end and of higher quality are required (Jeanjean & Stolowy, 2008).


1.2       Statement of the Problem.

Normally in organizations, financial transactions are handled and prepared by trusted servants of the organization. The organization’s accountants in collaboration with internal auditors are expected to prepare and present financial reports that show the true financial state of the organization concerned. The external auditor examines the financial records of the organization and makes an opinion as to whether the financial reports, in his opinion, are true reflection of the condition of the organization.

The above seems not always the case as financial statement may have been tailored towards the need of the management who might want to showcase a robust performance and very healthy organization. To that, the employees (accountants) are directed to prepare financial report to portray the organization positively. The unique nature of banking businesses which are anchored on goodwill and trust usually put such pressure on management who may erroneously believe that such creative accounting reports would attract more customers to the bank.

The practice seems not to have always paid off as could be seen from the following reported cases of organizational failure traceable to among other factors creative accounting issues, as in some cases, dividends have been paid out of capital as a result of the deceit associated with such reports. For instance, Enron an American energy giant that came into existence in July 1985 through the merger of Houston Natural gas and Inter North diversified from an energy producer to an energy trader in metal, coal, pulp and paper and other derivatives  got into creative accounting practice, which in 2001, led to its colossal collapse. Many other cases abound such as the cases of Ferranti International Signal and its subsidiary, the World Com Incorporated and collapse of many banks in Nigeria of which the most recent is the collapse of diamond bank PLC and its acquisition by Access Bank PLC.

The persistence of the menace makes the need for current study worthwhile. However, we acknowledge that many studies have been carried out on creative accounting such as Sene and Inanga (2004), Domash (2002), Amat, Blake and Dowds (1999) Naser (1993), Schiff (1993), and Alam (1988) Ibanichuka and Ihendinihu (2012), Effiok and Eton (2012) Ahmed (2017) Sanusi and Izedonmi(2013), Gosh (2010), and Fizza and Qaisar, (2015) which focused mainly on the impact of creative accounting on investors’ decisions in the stock market. In any case, little or no attention has been given on contribution of creative accounting on the corporate performance of the firm as it concerns the financial and non-financial performance indicators. The study therefore, wants to analyze the contribution of creative accounting practices on performance of Nigerian banks.


1.3       Objectives of the Study.

The broad objective of the study is to examine creative accounting and financial performance of deposit money banks in Nigeria while the specific objectives are to:

  1. Ascertain the contribution of creative accounting on non-financial performance of banks in Nigeria.
  2. Establish the contribution of creative accounting on financial performance of banks in Nigeria.
  3. To evaluate the correlation between creative accounting contribution on non-financial and financial performance of banks in Nigeria


1.4       Research Question.

The following questions were posed to assist in the study.

  1. What is the contribution of creative accounting on the financial and non-financial performance of banks in Nigeria?
  2. To what extent does contribution of creative accounting differ on the financial and nonfinancial performance of banks in Nigeria?
  3. To what extent does creative accounting contribution in non-financial performance correlate with that of financial performance in banks in Nigeria?


1.5       Hypotheses of the Study

The following null hypotheses were stated for empirical testing.

HO1: Creative accounting has no significant contribution on non-financial performance of banks in Nigeria.

HO2: Creative accounting does not have significant contribution on financial performance of banks in Nigeria.

HO3: There is no significant correlation in the contribution of Creative accounting on the non-financial and financial performance of banks in Nigeria.


1.6       Siginificance of the study

The significance of this research can be viewed from two major standpoints – practical and academic.

  1. Practical Significance: This study will assist in broadening the knowledge of the following:

Auditors: With the increasing litigations against auditors, it has become imperative for auditors to be aware of certain techniques which may be used by unscrupulous management to manipulate their financial statements. This study will bring to the awareness of auditors, certain creative accounting techniques that are used to manipulate the financial statements being audited by them. It will also provide a guide on critical audit areas that required special attention during the audit of the financial statements. Furthermore, the study will help them know whether book entries are used as creative accounting techniques and how such techniques affect audit work.

Managers: Managers often engage in manipulative accounting unconsciously due to the flexibility in the choice of accounting methods often allowed by accounting standards. Financial directors had in time past, been penalized for engaging in the manipulative accounting and as a result lost their jobs. This study will guide firms’ management on the need to ensure that accounting standards are adhered to and to ensure that necessary disclosures in respect of the accounting methods used should be contained in the financial statements.

Other stakeholders: The conflict of interest of the firm’s stakeholders has been a major reason why financial statements are often manipulated. Management, in a bid to meet the conflicting interests of the firm’s stakeholders often present financial statements that portray good performance. This study will assist the various stakeholders to be well guided in using the financial statements to make investment decisions and other vital decisions. Specifically, it will assist current and potential investors to make informed decision about investing in quoted companies.

b. Academic Significance

In academia, this study will prove to be significant in the following ways:

  1. It will contribute to the enrichment of literature on creative accounting, the concept of corporate risk and corporate failure.
  2. It will explain further the relationship, causative and ordinary, between corporate failure and creative accounting.
  • It will suggest ways, based on empirical findings, by which creative accounting practices, through the use of book entries, can be detected to prevent their impact, if any, on corporate failure.
  1. Finally, this study will serve as a reference point for other researchers.


1.7       Scope of the study

The study was carried out on creative accounting and financial performance of deposit money banks in Nigeria. The study focused on four banks out of 21 deposit money banks in Nigeria. The banks involved were two new generation and two old generation banks comprising: Zenith Bank PLC, Access Bank PLC, First Bank PLC and United bank for Africa (UBA) in Enugu, Enugu state.


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