The influence of creative accounting on the credibility of accounting reports

Abstract

PurposeThe extent to which accounting reports and disclosures provide shareholders and other interested parties with reliable information to permit informed investment decisions and true valuation of firms, has remained in doubts. The presumed bane for the failure of these reports to live up to expectation has been creative accounting. Most studies view this practice as unethical and should be stopped; others admit that although it contributes to enterprise failures, loss of investments and economic crisis, it as a necessary and legitimate practice. This paper aims to evaluate the extent to which this creativity has contributed to the failures of enterprises, identifies motivations for this practices and the challenges to true and fair reporting and transparent disclosures.Design/methodology/approachThe study adopts the survey method. Questionnaire were administered to 80 accountants in banks and other enterprises with parents companies outside Nigeria and secondary data collected on failed enterprises in the world. The data collected were descriptively analysed.FindingsThe findings were different from findings of previous studies. It was discovered that accounting creativity is euphemism and contributes 90% to the unfair reporting of firms operations. The creativity in those practices is motivated by greed and intended to deceive the public, potential investors and shareholders and increases the rate of enterprise failures at a decreasing rate. However, the study revealed that the many regulations without adequate checks, punishments and rewards complement creative accounting in providing the foundation for make-believe, cosmetic and unfair reporting.Research limitations/implicationsThe use of questionnaire and the subjective nature of the responses are the limitations of this study.Practical implicationsImproved reporting and valuation of firms are the practical implications.Social implicationsReduction in failures may result in loss of employment and other social implications.Originality/valueThe research is original and born out of the desire to improve accounting reports and shareholders value.