Corporate governance mechanisms and creative accounting practices: the role of accounting regulation

Abstract

The rising cases of the high profile corporate failures in recent years have been a source of concern to all stakeholders. Thus, the public have become more critical about the effectiveness of corporate governance mechanisms in reducing creative accounting practices. In response to the public outcry, the new legislative initiatives and other reforms were introduced by the various countries. This study investigates the impact of corporate governance mechanisms on creative accounting practices in Nigeria following the enactment of Financial Reporting Council of Nigeria (FRCN) Act 2011. With a sample size of 70 firms, we examine the impact of corporate governance mechanisms on creative accounting before FRCN Act for the periods (2005–2010) and after FRCN Act for the periods (2012–2017). We analysed our data using regression and difference-in-differences estimator. The findings show that the effectiveness of corporate governance mechanisms in reducing creative accounting practices has significantly improved with the enactment of FRCN Act 2011. The study concludes that regulatory intervention contributes to effective corporate governance mechanism which invariably minimizes creative accounting practices. Our finding underscores the role of regulators which is germane in corporate governance activities. The result of this study provides practical implication in the areas of good corporate governance, corporate reporting and accounting regulation. Our work extends prior research on the subject of corporate governance, creative accounting practices and accounting regulation in emerging economies.