Effect of Creative Accounting Practices on Solvency of Selected Deposit Money Banks Quoted in Nigeria

Abstract

The purpose of deposit money banks is to maximize solvency by acting as an economic intermediary between economic sectors that are in deficit and those that are in surplus. One of the main goals of deposit money banks' existence is to achieve solid bank solvency. However, fraud manner of using creative accounting measures in manipulating bank financial information has resulted to insolvency and collapsed of deposit money banks in Nigeria. The objective of the study is to examine the effect of creative accounting practices (cash assets structure, equity capital structure, loan structure, deposit liability and accrual quality) on solvency of selected deposit money banks quoted in Nigeria. The population of the study comprised of all the nineteen (19) listed deposit money banks as at December, 2021 while a targeted random sampling technique was adopted to select the sample size of ten (10) failed banks and seven (7) surviving commercial banks listed in Nigeria Stock Exchange (NGX). Ex post facto research design was adopted using dataset for the period 2006–2021 which were collated from the annual reports and financial statements of the listed deposit money banks. The data collected were analyzed using mean scores and Panel Regression Model method. The analysis revealed that three of the proxies of creative accounting such as cash assets structure, equity capital structure and deposit liability negatively but insignificantly influenced the survival of the DMBs, accrual quality is having a negative and significant effect on survival of the banks while only loan structure is having a positive but insignificant effect on survival of the DMBs on bank solvency (AdjR²= 0.258, F= 12.07: p < 0.05); while for failed banks, it was revealed that cash assets structure, and equity capital structure have positive and significant effect but equity capital structure has negative and significant effect while loan structure, deposit liability and asset quality have positive and insignificant effect on bank solvency (AdjR²= 0.33, F= 7.38: p < 0.05). The study concluded that creative accounting measures affect bank solvency in Nigeria. Therefore, the study recommended that bank managers should endeavor to employ accounting measures based on global and accounting standard so as to enhanced bank solvency among deposit money banks in Nigeria.