A Study to Show the Relation between Creative Accounting and Corporate Governance

Abstract

The concept of corporate governance and creative accounting has come into picture after the big accounting scandals (Enron, WorldCom, Satyam computers etc.). Corporate governance represents the manner in which a company is directed and controlled and this aspect is closely related to creative accounting practices, ownership structure, board of director’s structure, they all can encourage or discourage creative accounting practices. Corporate governance is a current issue with great impact on creative accounting. Occurrence of creative accounting is related to weakness of corporate governance. The paper is structured as follow, at first some definitions of creative accounting and corporate governance after introduction. After that role of corporate governance in detecting creative accounting practices is shown, theories of corporate governance are bring into attention to identify the nature, existence and incidences. Comparative analysis of top scandals is also shown on the basis of some corporate governance parameters. In this paper we examine the relation between creative accounting and corporate governance. Corporate governance is measured through TDI, and results that more information is provided on audit committee and for company’s shareholders as compared to its Board structure and disclosure practices. Creative accounting is measured by performance indicators like Tobin’s Q, ROA, ROCE, Debt/Equity. In correlation we find significant negative relationship between ROCE and leverage of firm, and significant positive relationship between P/E and leverage.