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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 Abak LGA helped the players in accounting profession to empirically understand the implications of such practices on shareholders wealth of firms in Abak.

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 Abak LGA.

1.2       Statement of the Problem

In recent years, researchers have debated about creative accounting which is widely used to describe accepted accounting techniques which permit corporations to report financial results that may not accurately portray the substance of their business activities. Preparers of financial statements are in a position to manipulate the view of economic reality presented in those statements to interested parties. However, an emerging stream of literature, which examines tax avoidance in an agency framework, suggests that opportunistic managers employ the technologies of tax avoidance to advance managerial, rather than shareholder, interests (Desai & Dharmapala, 2009).

Regulators of accounting profession seem to be silent on the issue of creative accounting yet it is widely practiced among many companies in the country (Mauwa, 2016). Further users of accounting information seem not to have perceived this practice of creative accounting which has led to collapse of many major companies globally such as Enron and world com (Ayala & Giancarlo, 2009).  

As much as there are many studies that have attempted to unravel the problem of creative accounting a study by Joshi & Li (2016) who argued that most of the business enterprise have been linked with fraudulent activities as well as largely affected by financial collapses. On analysis, it is noted that most of the standards that are being set for the audit or accounting have been eroded.

To explain the concept in detail, it is understood that the current business environment as well as more economic recession recently had pushed the top management authority of most of the organization to pay attention on how to make the financial statements of their company so that it look better and able to attract the investors (Yadav, Kumar & Bhatia, 2014). By using creative accounting practices, the company manipulates figures in their financial statements either they increase or decrease the numbers and it entirely depends upon what the company need to achieve at that particular point of time. Fraud nowadays had become one of the major threats for business organizations (Del Brio, Lopes-e-Silva & Perote, 2016). Fraud is treated as big risk that incurs a very big cost that results in several other problems where stakeholders lose confidence and interest. In addition, the researcher finds out the issues and makes an effort to come with a solution to financial statement fraud. Furthermore, the particular research work will focus upon involvement of auditor in solving creative accounting problems. Therefore, the researcher tries to focus upon corporate government and uses as a tool that will help in fraud detection as well as prevention at the same time (Ozuomba, Anichebe & Okoye, 2016).

1.3       Objectives of the Study

The study sought to know the effect of creative accounting on shareholders’ wealth. Specifically, the study sought to;

1.      examine the relationship between creative accounting and shareholders’ wealth.

2.      determine the effect of income smoothing on shareholders’ wealth.

3.      ascertain whether creative accounting practices significantly affect shareholders’ investment decisions.

1.4       Research Questions

1.      What is the relationship between creative accounting and shareholders’ wealth?

2.      What is the effect of income smoothing on shareholders’ wealth?

3.      Do creative accounting practices significantly affect shareholders’ investment decisions?

1.5       Research Hypotheses

Ho1: There is no significant relationship between creative accounting and shareholders’ wealth.

1.6       Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.7       Scope/Limitations of the Study

This study is on effect of creative accounting on shareholders’ wealth. The study will be carried out on selected auditors in Abak Local Government Area, Akwa Ibom State, Nigeria.

Limitations of study

1.               Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

2.               Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8       Definition of Terms

Creative Accounting: Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules.

Shareholders wealth: shareholder wealth is the collective wealth conferred on shareholders through their investment in a company.


Amat, O., & Gowthorpe, C. (2010). Creative Accounting: Nature, Incidence and Ethical Issues; Journal of Economic Literature Classification: M41; 11- 15

Ezeani, N. S. (2010). Impact of Audit Report on the job performance of Accountants in the public Sector 10 – 13. Unpublished

Gherai, S. D. and Balaciu, M. D. (2011), From Creative accounting practices and enron phenomenon to the current financial crisis; Annales UniverstatisApulensis Series Oeconomica Vol 1, issue 13, 3.

Kamau, C. G., Mutiso, A. N., &Ngui, D. M. (2015). Tax avoidance and evasion as a factor influencing Creative Accounting practice among companies in Nigeria. Journal of Business Studies Quarterly, 4(2), 77-84.

Odia, J. O. and Ogiedu K.O. (2013). “Corporate Governance, Regulatory Agency and Creative Accounting Practices in Nigeria”, Mediterranean Journal of Social Sciences; Vol. 4 No.3.

Ozkaya Ata (2014). “Creative accounting practices and Measurement Methods: Evidence from Turkey”: Economics e-journal http://www.economicsejournal .org/economics/discussion papers/2014-10. 48

Salome, E. N., Ezemoyih, C., &Echezonachi, O. E. (2012). The effect of Creative Accounting on the job Performance of Accountants (Auditors) in reporting Financial Statement in Nigeria. Kuwait Chapter of the Arabian Journal of Business and Management Review, 1(9), 1-30.

Sawabe, N. (2009). Co-evolution of Accounting Rules and Creative Accounting Instruments: The Case of a Rules based Approach to Accounting Standard Setting, Evol. Inst. Econ. Rev, Vol: 1, No: 2, pp. 177–195

Simser, J. (2008) "Tax evasion and avoidance typologies", Journal of Money Laundering Control, Vol. 11 Iss: 2, pp.123 – 134.


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