IS ACCOUNTING ALCHEMY STILL THE RIGHT MEDICINE FOR FIRM’S EARNINGS AND BOOK VALUE? EVIDENCE FROM SUB-SAHARAN AFRICA

Edesiri Godsday Okoro,Chizoba M Ekwueme

doi:10.1590/1678-6971/eramf210007

Edesiri Godsday Okoro, Chizoba M Ekwueme

Open Access

https://doi.org/10.1590/1678-6971/eramf210007

Copy DOI

Abstract

ABSTRACT Purpose: A major thread in accounting literature, which has remained a contentious issue, is how accounting alchemy can be modeled. The paper builds on existing accrual models in proposing an accounting alchemy model and tests if it is still the right medicine for earnings and book value of firms. The accounting alchemy model was based on mechanisms of earnings, book value, earnings before extraordinary items, net profit after tax, cash flow from operations, revenue, and total assets. We modified accrual models on the view that accrual models suggest that incomes/expenses are the most manipulated; contrarily, accounting alchemy proposes that assets are alchemized. Originality/value: This paper proposes a new empirical model of accounting alchemy and practically assesses the validity of the model in Sub-Saharan Africa, where there are no studies. The proposed accounting alchemy model can be used in Asia, Europe, and other parts of the world to see if the study results can be replicated. Design/methodology/approach: Ex post facto design was used, and secondary data were obtained for selected quoted firms in Sub-Saharan Africa comprising Nigeria, South Africa, and Kenya from 2012 to 2016. A sample of 64 firms was selected in the consumer and industrial goods subsector, and data were analyzed via descriptive (mean, standard deviation, correlation) and inferential (regression, fixed, and random effects) statistics. Findings: Findings indicated that earnings and book value are significantly affected by accounting alchemy. This implies that accounting alchemy is not the right medicine for firm’s earnings and book value. The result has practical application for researchers and the regulatory framework of accounting.

Highlights

The misuse of management discretion of accounting choices or alternatives has been an issue of concern to accounting and management researchers but to accounting practitioners and regulators
Accounting alchemy goes on to provide corrective measures, like employing changes in earnings before interest and extraordinary items and profit after tax, in order to account for the hypothetical forecast error associated with accounting numbers
More so, accounting alchemy models provide corrective measures aimed at accounting for the hypothetical forecast error associated with accounting numbers, as well as unraveling accounting measures of performance to become real performance

Summary

Introduction

The misuse of management discretion of accounting choices or alternatives has been an issue of concern to accounting and management researchers but to accounting practitioners and regulators. This concern stems from the fact that the globalized reporting framework of accounting (International Financial Reporting Standards – IFRS) permits management to employ dissimilar choices of accounting judgments in adjusting an entity’s cash flows. A pathway of unraveling accounting measures of performance (hypothetical) and real performance (actual), gave birth to the concept of accounting alchemy. Verracchia (2009) asserts that accounting alchemy is an enemy of greater transparency in financial reporting, given the fact that it can hinder the pathway towards obtaining transparent and reliable financial reports; that accounting alchemy exists, and it is believable and unsettling (Barth, 2010)

Objectives

Methods

Conclusion