International Journal of Financial and Business Studies (IJFABS)

https://ijfabs.org/journals/
ISSN: Online-2811-1664; Print-2811-1656

EFFECT OF CREATIVE ACCOUNTING ON

STAKEHOLDERS’ WEALTH OF QUOTED BANKS IN
NIGERIA

Obiorah Justina Ngozika

Department of Accountancy, School of Financial Studies
Federal Polytechnic, Oko
Email: justinaobiorah@gmail.com

Abstract: This study evaluated the effect of creative accounting on stakeholders’ wealth of banks listed on
Nigeria Stock Exchange (NSE) from 2010-2019. Discretionary accrual was used as a proxy to measure creative
accounting practices. The research used inferential statistics to examine the major practices of creative
accounting that influenced stakeholders’ wealth in commercial banks. A sample of thirteen banks (13) was
drawn using purposive sampling technique. Linear regression technique was used to analyze the relationship
between creative accounting practices and stakeholders’ wealth and the correlation between the variables. The
secondary data were collected from NSE fact books, financial statements and the website of quoted banks that
were sampled. E-Views 10.0 was used in carrying out the regression analysis to establish the relationship
between creative accounting practices and stakeholder’s wealth. Stakeholders’ wealth was measured using
return on equity and return on capital employed. The study found that discretionary accruals negatively affects
return on equity, however, significant; and a non-significant positive effect of discretionary accruals on return
on capital employed. Thus, this study recommended amongst others that organizations should encourage ethical
behavior in the company by educating and creating awareness on the importance of ethical behavior and
accounting ethics.

Keywords: Discretionary Accruals, Return on Equity, Return on Capital Employed

1.Introduction
The financial statements are mediums by which the stakeholder’s gain an understanding about the financial
condition and operating performance of organizations. Current accounting practices allow for a degree of choice
of policies and personal judgment in determining the method of measurement, criteria for recognition. The
exercise of such choice could involve a deliberate non-disclosure of information and manipulation of accounting
figures thereby making the business appear more profitable (or less profitable for tax purposes) and financially
stronger than it should be, this practice is termed “ Creative Accounting”. According to Gabar (2015) creative
accounting is the transformation of financial figures from what they are to what managers’ desire by taking
advantage of some loopholes in accounting rules. Creative accounting could be called earnings management,
cosmetic accounting, aggressive accounting, cooking the books, and deceptive accounting. Obara and Nangih
(2017) identified creative accounting practices to include: recognizing premature or fictitious revenue,
aggressive capitalization and extended amortization policies, misreported assets and liabilities, getting creative
income statement and problems with cash flow reporting. The major difference between creative accounting and
fraud is that creative accounting is working within the regulatory framework but fraud involves breaking the law
or violating regulatory framework (Amahalu, Egolum & Obi, 2019). Stakeholders are those who have interest in
a company, and can either affect or be affected by the activities of the organization. They include shareholders,

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creditors, employees, suppliers, government or the local community. Stakeholder’s wealth refers to the
minimum return each interest group will receive since withdrawal of their contribution may lead to closure of
the company. However, the real cause of creative accounting practices lies in the conflicts of stakeholders as a
result of their different interests in the organization (Patrick, Tavershima, & Eje, 2017). These interests are to
the shareholder higher financial return, customer’s wants money spent on research and development, employees
want higher wages and better benefits, while the local community wants better facilities and other benefits.

1.1 Statement of the Problem

The collapse of Savannah Bank, African International Bank (AIB), Oceanic Bank, Skye Bank overstatement of
Cadbury’s account between N13 billion to N15 billion over a number of years, accounts manipulation in the
privatization of African Petroleum (AP) and the sack of five chief executive officers of Nigerian banks by the
Central Bank of Nigeria and Enron’s fall of 2001 have been linked to creative accounting practices. They also
opined that these practices were perpetuated by management and staff in connivance with auditors. However,
the collapse of firms has always inflicted its stakeholders with negative marks resulting in varying negative
growth in major indices of organizational performance. Past studies on creative accounting have focused mainly
on the effect of creative accounting on shareholders wealth in the stock market without paying attention to other
stakeholders. Therefore, this situation leaves a significant gap in literature. Hence, the need to examine the
effect of creative accounting on stakeholders’ wealth of quoted banks in Nigeria.

1.2. Objectives of the study

The main objective of this study is to determine the effect of creative accounting on stakeholders’ wealth of
quoted banks in Nigeria. The specific objective is to;
i. To ascertain the effect of discretionary accruals on the return on equity of quoted banks in Nigeria.

ii. To establish the effect of discretionary accruals on the return on capital employed of quoted banks in
Nigeria.
1.3. Hypotheses of the Study
Based on the objectives of this study, the following null hypotheses were hypothesised:
Ho1: Discretionary accrual has no significant effect on the return on equity of quoted banks in Nigeria.
Ho2: Discretionary accrual has no significant effect on the return on capital employed of quoted banks in
Nigeria.
2.1. Conceptual Review
Creative Accounting
Creative accounting is a process whereby accountants, capitalize on their understanding of accounting rules to
manipulate the reported figures in books of account of a business (Umobong & Ironkwe, 2017). Creative
accounting refers to the manipulation of normal accounting and financial statement by moving accounts around,
changing their locations and subheads, redefining accounting and even inflating accounts in order to present an
unattractive picture of the state of health of an organization being pursued (Kamau, Namusonge & Bichanga,
2016). Leyira & Okeoma (2017) observe that creative accounting is the transformation of accounting figures
from what they actually are to what management desires by taking advantage of existing rules and/ or ignoring
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 International Journal of Financial and Business Studies (IJFABS)
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some or all of them. Creative accounting is accounting practices that deviate from standard accounting
practices. Creative accounting is the use of accounting knowledge to influence the reported figures, while
remaining within the jurisdiction of accounting rules and laws, so that of showing the actual position of the
company, they reflect what the management wants to tell the stakeholders (Ubogu, 2019).
Discretionary Accrual
Discretionary accrual is the amount of asset or liability that is not mandatory but is recorded in the system and
that would be realized later when settled. Discretionary Accruals are accruals that do not result from the normal
course of business activity, also known as abnormal accruals. Discretionary accrual is a non-mandatory
expense/asset that is recorded within the accounting system that is yet to be realized. An example of this would
be management bonus (Adalene, Costa & Kronbauer, 2018). Accrual refers to a journal entry where a revenue
or expense item is recorded in the absence of an actual cash transaction. Discretionary accruals mean that the
company uses its own discretion in deciding whether or not to make the accrual or not. If not, they do not show
the liability on the financial statements (Sheeraz, 2020).
Stakeholders’ Wealth
A stakeholder is a party that has an interest in a company and can either affect or be affected by the business.
The primary stakeholders in a typical corporation are its investors, employees, customers, and suppliers
(Amahalu, Okoye & Obi, 2019). In business, a stakeholder is any individual, group, or party that has an interest
in an organization and the outcomes of its actions. Common examples of stakeholders include employees,
customers, shareholders, suppliers, communities, and governments. Different stakeholders have different
interests, and companies often face trade-offs in trying to please all of them (Freeman & McVea, 2001). A basic
rationale for the objectives of maximizing the wealth position of a stakeholder as a primary goal is that such an
objective may reflect the most efficient use of society’s economic resources as this lead to a society’s economic
wealth (Oshiole, Elamah & Ndubuisi, 2020). The shareholder wealth maximization goal states that management
should endeavour to maximize the net present value of the future expected cash flows to the shareholder of the
firm (Al-Dalabih, 2017). With a view of stakeholders as creditors, employees, customers, suppliers,
communities in which a company operates, their value maximization is essential in keeping a firm running
smoothly. Value creation occurs when we maximize the share price for current stakeholders. The efficiency of
Financial Management of any firm is judged by the success in achieving the firm’s goal. This approach
considers that firms are an integrated part of society and the Community as a whole. So, it is the moral and
ethical duty of the firm to look after and protect the interests of all the components of the firm and society. This
approach encompasses both normative as well as positive aspects. Firms should look beyond the maximization
of the returns of their shareholders (Amahalu & Obi, 2020) and should adopt a wider perspective of stakeholders
which includes the customers, society, and environment.
Return on Equity
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by
shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is
considered the return on net assets. ROE is considered a measure of how effectively management is using a
company’s assets to create profits (Marshall, 2020). Return on equity (ROE) is a ratio that provides investors
with insight into how efficiently a company (or more specifically, its management team) is handling the money
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 International Journal of Financial and Business Studies (IJFABS)
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ISSN: Online-2811-1664; Print-2811-1656
that shareholders have contributed to it. In other words, it measures the profitability of a corporation in relation
to stockholders’ equity. The higher the ROE, the more efficient a company's management is at generating
income and growth from its equity financing (Furhmann, 2019).
Return on Capital Employed
Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability
and capital efficiency. In other words, the ratio can help to understand how well a company is generating profits
from its capital. The ROCE ratio is one of several profitability ratios financial managers, stakeholders, and
potential investors may use when analyzing a company for investment (James, 2020). ROCE is a financial ratio
that determines a company’s profitability and the efficiency the capital is applied. A higher ROCE implies a
more economical use of capital; the ROCE should be higher than the cost, if not, the company is less productive
and inadequately building shareholder value.
ROCE EBIT / Capital Employed
EBIT = Earnings before Interest and Tax
Capital Employed = Total Assets – Current Liabilities
Creative Accounting and Stakeholders Wealth
Practices of creative accounting has facilitated many companies beyond financial crises than put them into
crisis. The fault when it emerges lies with the user of the financial information (Munene, 2016). Shareholders‟
wealth is influenced by various factors. These factors include dividend policy, earnings after tax and interests,
changes in share prices and market forces. The assumption is that creation of shareholders’ wealth is the primary
objective of most listed companies; therefore existing and potential shareholders focus on maintaining and
building of wealth they have invested in a listed company for an economic gain. Several authors have tried to
investigate the relationship between creative accounting and firm performance, but the results thereof has been
mixed. For instance, Fizza & Qaisar (2015); Okere Imeokparia, Ogunlowore and Isiaka (2018) found a
significant negative relationship between creative accounting and firm performance. Essien and Ntiedo (2018);
Ubogu (2019) reported a significant positive relationship between creative accounting and firm performance,
while, Ndebugri & Tweneboah (2017) postulated a non-significant negative relationship between creative
accounting and firm performance.
2.2. Theoretical Framework
Agency Theory
Agency theory was based on the idea that when a company is first established, its owners are usually managers.
As a company grows, the owners appoint managers to run the company. The owners expect the managers to run
the company in the best interests of the owners; therefore a form of agency relationship exists between the
owners and the managers (Amahalu & Obi, 2020). Many companies borrow, and a significant proportion of the
long-term capital of a company might come from various sources of debt capital, such as bank loans, lease
finance and bond issues (debentures, loan stock and so on). Major lenders also have an interest in how the
company is managed, because they want to be sure that the company will be able to repay the debt with interest.
Empirical Review
Bankole, Ukolobi and McDubus (2018) establish the effect of creative accounting on shareholders’ wealth.
Inventory valuation, depreciation policy and debtors ageing schedule were used as proxies for creative
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accounting. The study reviewed the theories and techniques of creative accounting as well as the determinants of
shareholders wealth. Empirical studies on creative accounting were reviewed. The study adopted the survey
research design. The population of the study consisted of all managers and accountants in all the 57 financial
service institutions listed in the Nigerian Stock Exchange. The study found that frequent changes in inventory
valuation and in depreciation policy affected shareholders wealth. It found that frequent manipulation of ageing
schedule for the purpose of determining bad and doubtful debts provision had no significant effects on
shareholders wealth. The study recommends stricter monitoring of entities to ensure full disclosures of changes
in accounting policies with a view to guarding against immoral behaviors.
Okoye and James (2020) examined the impact of creative accounting techniques on firm financial performance.
Creative accounting was measured by asset structure (Using Cookie Jar Reserves), capital structure (Creative
Acquisition Accounting), deposit liabilities (Manipulating Inventory), loan structure (Abuse of Materiality
Concept). Ex-post facto research design was adopted. Data were collected from Nigeria Security and Exchange
Commission on listed deposit money banks in Nigeria from 2008-2018. Descriptive analysis and ordinary least
square were adopted for analysis. Findings from the analysis revealed asset structure and equity capital are
negatively and non-significantly related to return on asset; Loans and advances is positively and non-
significantly related to its returns on assets while Total deposit liabilities is positively and non-significantly
related to return on assets. However, it was concluded that banks asset structure and management in Nigeria has
been poor and their assets have not been effectively used to enhance their profitability. Based on the findings,
the study suggested that there is need to employ statutory auditor in reducing the effect of creative accounting
techniques on the reliability of financial reporting. Again active corporate governance principles can be used to
control the practices of creative accounting by using independent non-executive directors.
Siyanbola, Benjamin, Amuda and Lloyd (2020) evaluated the effects of creative accounting on investment
decision in selected listed manufacturing firms in Nigeria’s real sector for the period of 2007 to 2017. The study
was empirically carried out by extracting related data from CBN statistical bulletin and NDIC annual reports for
the period on which regression analysis was used. The result revealed a positive but insignificant effect of
creative accounting on investment decisions in listed manufacturing firms in Nigeria’s real sector as it reflects in
the adjusted R2 of 0.742983 or 74.30%. The study therefore concluded and recommended that proper corporate
governance should be applied to ensure that creative accounting is used for stakeholder’s benefits.
3. Methodology
3.1. Research Design
This study employed ex-post fact research design.
3.2.Population of the Study
The population of this study covered fourteen (14) quoted banks in Nigeria. These banks are as follows; Access
Bank; First Bank; FCMB; GTB; Jaiz Bank; Zenith Bank; Sterling Bank; UBA; Fidelity Bank; Stanbic IBTC;
Union bank; Unity Bank; Wema Bank; Eco Bank.
3.3.Sample Size and Sampling Technique
This research adopted purposive sampling technique based of the availability and up-to-date annual financial
statements for the study period (2010-2019) in the selection of the sample size. In view of this, thirteen (13)
quoted commercial banks served as the sample size of this study. The sample banks include: Access Bank; First
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Bank; FCMB; GTB; Zenith Bank; Sterling Bank; UBA; Fidelity Bank; Stanbic IBTC; Union Bank; Unity Bank;
Wema Bank; Eco Bank.
3.4. Sources of Data Collection
The panel data used for this study were collected from secondary source. This data is obtained from ten years’
annual reports and accounts of the thirteen sample banks.
3.5. Measurement of variables

Variable Type Measurement

Discretionary Accruals Independent Operating profit after tax-cash flow operations (Modified
(TA) Jones Model)
Return on equity (ROE) Dependent Profit after tax and preference dividend/Share capital +
reserves
Return on capital Dependent Earnings Before Interest and Tax (EBIT)/Capital employed
employed (ROCE)

3.6. Model Specification

This study adopted the Panel Least Square (PLS) regression method of analysis. For the purpose of the study an
econometric model is specified and estimated.
The linear functional specification is shown thus;
ROE = ƒ (DA)
ROCE= ƒ (DA)
The econometric specification is thus;
Y = βo + βX1 + µ
ROE = βo + β1DA + µ - - - Model 1
ROCE= βo + β1DA + µ - - - Model 2
Where;
DA= Discretionary Accruals in year t for bank ί
ROE= Return on equity in year t for bank ί
ROCE= Return on capital employed in year t for bank ί
µ = Error term
βo = slope of the model
β1 = coefficient of parameters

4. Data Presentation and Analysis

Table 1: Correlation Matrix of variables in Banking Industry

ROE ROCE DA
ROE 1.0000 -0.1395 -0.4243
ROCE -0.1395 1.0000 0.6062
DA -0.4243 0.6062 1.0000
Source: E-Views 10.0 output, 2020

4.1. Interpretation of Correlation Matrix Result

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The correlation result as presented in table 1 indicates that discretionary accruals positively correlate with
ROCE (0.6062), but negatively correlates with ROE (-0.4243).
4.2. Hypotheses Testing
4.2.1. Test of Hypothesis I
Ho1: Discretionary accrual has no significant effect on return on equity of quoted banks in Nigeria.
H1: Discretionary accrual has significant effect on return on equity of quoted banks in Nigeria.

Table 2: Regression Result of Discretionary Accruals and ROE

Dependent Variable: ROE
Method: Panel Least Squares
Date: 09/15/20 Time: 12:16
Sample: 2010 2019
Periods included: 10
Cross-sections included: 13
Total panel (balanced) observations: 130

Variable Coefficien Std. Error t-Statistic Prob.

t

C 1.737993 0.792538 2.192947 0.0306

DA -0.130866 0.127615 -2.025474 0.0335

R-squared 0.610106 Mean dependent var 0.927388

Adjusted R-squared 0.400496 S.D. dependent var 0.586554
S.E. of regression 0.586409 Akaike info criterion 1.789265
Sum squared resid 35.41915 Schwarz criterion 1.839816
Log likelihood -91.93640 Hannan-Quinn criter. 1.809749
F-statistic 4.051597 Durbin-Watson stat 1.958010
Prob(F-statistic) 0.033542

Source: E-Views 10.0 regression output, 2020

Interpretation of Regression Result

Table 2 shows the regression result of discretionary accruals and return on equity. It shows that, given a unit
increase in DA, ROE will decrease by 0.13%. Table 2 shows that, the t-value for discretionary accruals is -
2.025474 with a probability value of 0.0335, suggesting that discretionary accrual exerts negative influence on
ROE at 5% significant level. The R-squared of 0.61 suggests that variation in ROE is explained by DA
fluctuation by 61% while the remaining 39% is explained by other factors outside the model. The result shows
that there is a significant negative relationship between DA and ROE.
Decision
The value of t-calculated of -2.025474 with the associated probability of 0.0335 is less than the significance
level of 0.05 (5%); the null hypothesis is therefore rejected at 5% level of significance implying that a
significant negative relationship exist between discretionary accruals and ROE of quoted commercial banks in
Nigeria.

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4.2.2. Test of Hypothesis II
Ho2: Discretionary accrual has no significant effect on return on capital employed of quoted banks in Nigeria.
H2: Discretionary accrual has significant effect on return on capital employed of quoted banks in Nigeria.

Table 3: Regression Result of Discretionary Accruals and ROCE

Dependent Variable: ROCE

Method: Panel Least Squares
Date: 09/15/20 Time: 12:17
Sample: 2010 2019
Periods included: 10
Cross-sections included: 13
Total panel (balanced) observations: 130

Variable Coefficien Std. Error t-Statistic Prob.

t

C -4.053090 135.3070 -0.029955 0.9762

DA 0.259459 21.78718 0.223042 0.8239

R-squared 0.430483 Mean dependent var 26.04729

Adjusted R-squared 0.309221 S.D. dependent var 99.65696
S.E. of regression 100.1154 Akaike info criterion 12.06939
Sum squared resid 1032378. Schwarz criterion 12.11994
Log likelihood -631.6429 Hannan-Quinn criter. 12.08987
F-statistic 0.049748 Durbin-Watson stat 1.413520
Prob(F-statistic) 0.823944

Source: E-Views 10.0 regression output, 2020

Interpretation of Regression Result

Table 3 shows the regression result of discretionary accruals and return on capital employed. It shows that,
given a unit increase in DA, ROCE will increase by 0.26%. Table 3 shows that, the t-value for discretionary
accruals is 0.223042 with a probability value of 0.8239, suggesting that discretionary accrual exerts positive but
non-significant influence on ROCE. The R-squared of 0.43 suggests that variation in ROCE is explained by DA
fluctuation by 43% while the remaining 57% is explained by other factors outside the model. The result shows
that there is a non-significant positive relationship between DA and ROCE.
Decision
The value of t-calculated of 0.223042 with the associated probability of 0.8239 is greater than the significance
level of 0.05; the null hypothesis is therefore accepted at 5% level of significance implying that a non-
significant positive relationship exist between discretionary accruals and ROCE of quoted banks in Nigeria.

5. Findings, Conclusion and Recommendations

5.1. Findings
The specific findings of this study are that:
i. There is a significant negative relationship between discretionary accruals and return on equity of
quoted banks in Nigeria.
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ii. There is a non-significant positive relationship between discretionary accruals and return on capital
employed of quoted banks in Nigeria.
5.2. Conclusion
This study examined the effect of creative accounting on stakeholders’ wealth of quoted banks in Nigeria for the
period 2010-2019. Data analysis revealed that discretionary accruals exerted a significant negative effect on
return on equity and a non-significant positive effect on return on capital employed at 5% significant level.
5.3. Recommendations
The following suggestions are put forward based on the findings of this study:
1. Since discretional accrual has significant negative effect on return on equity, management of firms
should always implement their ethical codes of conduct in order to maintain commitment in achieving
all stakeholders trust.
2. Based on the finding that discretionary accruals have non-significant positive effect on return on capital
employed, organizations should encourage ethical behavior in the company by educating and creating
awareness on the importance of ethical behavior and accounting ethics.

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Ubogu, F.E. (2019). Effect of creative accounting on shareholders’ wealth in business organization: a study of
selected banks in Delta State in Nigeria. International Journal of Social Sciences and Humanities
Review, 2(2), 44-62.
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 International Journal of Financial and Business Studies (IJFABS)
https://ijfabs.org/journals/
ISSN: Online-2811-1664; Print-2811-1656
Ubogu, F.E. (2019). Effect of creative accounting on shareholders’ wealth in business organization: a study of
selected banks in Delta State in Nigeria. International Journal of Social Sciences and Humanities
Review, 2(2), 44-62.

Umobong, A.A., & Ironkwe, U. (2017). Creative accounting practices and financial performance of firms.
International Journal of Innovative Finance and Economics Research, 5(1), 1-10.

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Volume 1 Issue 1, June 2021
www.ijfabs.org Copyright©2021 IJFABS All rights reserved