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CREATIVE ACCOUNTING AND CORPORATE FAILURES (A CASE STUDY OF NIGERIAN BANKS)
CREATIVE ACCOUNTING AND CORPORATE FAILURES (A CASE STUDY OF NIGERIAN BANKS)
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Accounting profession has come under severe criticism, perhaps the greatest in history and perhaps the last in history. This is due to the sudden collapse and failure of some industrial giants. From the United States of America to the United Kingdom, Italy, Germany, India, and to Nigeria the story is basically the same. Whenever there is any corporate failure the question that is asked is: where were the auditors? Many renowned authors, researchers and the general public believe that corporate failures are synonymous with audit failure. This has put question mark on the integrity and competency of professional accountants. Enron, Polly Peck, Parmalat, Xerox, Lehman Brothers, Satyam, Bank PHB and Spring Bank are examples of major corporate failures strengthening the concept of creative accounting and resulted in the demise of Andersen, a reputable firm of chartered accountants, and indictment, of the big four.
Subhajit (2010) remarks that creative accounting is at the root of a number of accounting scandals and corporate collapses. Many companies manipulate accounting figures and embark on deliberate breaches of the accounting system and control in order to facilitate the financial reporting goals established by management (Emma, Steve & Uche, 2009). There seems to be a relationship between creative accounting and corporate failure. It is equally believed that corporate failures have many parents, but the most critical of these were breakdowns on how executives perceived reality for their companies, how people within an organization face up to their reality, how information and control system in organization were mismanaged, and how organizational leaders adopted spectacularly unsuccessful habits. Suffice to say that the real story is much more complex than any of these explanations and much more fascinating.
The ongoing sweeping reform in the banking sector in Nigeria is not unconnected with series of failures and instability in the system. If there is anything that all well meaning stakeholders in the Nigerian Banking industry look forward to, it is a banking sector that is healthy and stable. There is no gainsaying that our economy deserves a sound and stable banking system that can face and stand firmly from the global economy (Sanusi, 2003). It appears that practicing accountants cannot be exonerated from corporate collapses. Some have argued that financial misconduct perpetuated by banks through which their financial statements are overstated cannot be possible without the active involvement of their external auditors. In August 2009, the CBN announced the removal of the managing directors of five banks on account of poor risk management, bad corporate governance and rendering of false returns. Surprisingly enough, the accounts of the banks were audited by foremost auditing firms in Nigeria with international reputation. Therefore, this study aims at exploring the relationship between creative accounting and corporate failures in Nigerian banking industry.
1.2 Statement of the Problem
Distress and failures are hard facts of corporate life. However, some of such failures are episodic and often associated with fraudulent accounting. Thus we have had the episodic failures of Enron, parmalat, Lehman brothers, bank PHB, spring bank and Afrikbank etc. The systemic failure of the aforementioned corporate organizations were attributable to among others factors, unethical practices and financial mismanagement by the directors. The non-discovery of such mismanagement of the organization’s resources by their external auditors has agitated several questions in the minds of many people. Surprisingly enough, it was observed with dismay that the management of these companies has used professional accountants (external auditors) to accomplish their selfish interests. The recent three banks took over by the CBN had been audited in the past and were given clean bill of health immediately before the collapse. Nwachukwu (2009) states that management of the failed banks were used to manipulating accounting figures and embark on deliberate breaches of the accounting system and control. Sadly enough most of the banks rendered false returns to the regulators (CBN and NDIC) of the banking sector.
1.3 Research Questions
The main research problem was broken down into three sub problems stated as research questions. Attempts were made in the course of the study to provide answers to the following questions.
i. What is the primary objective of creative accounting?
ii. Is there any relationship between creative accounting and bank failures in Nigeria?
iii. Does creative accounting mislead users of financial statements?
1.4 Objectives of the Study
The aim of the study is to examine the relationship between creative accounting and corporate failures in Nigeria banking industry. The specific objectives of this study are as follows:
i. To examine the primary objective of creative accounting.
ii. To examine the relationship between creative accounting and bank failures in Nigeria.
iii. To examine if creative accounting mislead users of financial statements.