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The Effect of Creative Accounting on Audit Failure: The Case of Manufacturing Companies Quoted on the Nigerian Stock Exchange

Journal: International Journal of Accounting and Financial Management Research (IJAFMR) (Vol.4, No. 1)

Publication Date:

Authors : ; ;

Page : 9-14

Keywords : Creative Accounting; Audit Failure; Corporate Failure and Financial Statements;

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The Companies and Allied Matters Act (CAMA) 1990 mandates External Auditors of Companies to conduct their audit and give independent opinion on the financial statements audited by them. Users of financial statements derive substantial confidence that the accounts give a true and fair view of the financial position of the firm from such auditor’s opinion. On several occasions however, such confidence have proven to be misplaced. Corporate failures and material misstatements have occurred on the hills of ‘clean bill of health’ opinions of auditors. Curiously, the auditors have continued to insist that the accounts actually present a true and fair view of the affairs of the entities audited and that they exercised both due care and professional diligence and skill in the conduct of the audits. Could it be that the management manipulate the accounts so carefully that the auditors remain hoodwinked throughout the audit? Essentially, manipulations of accounts to achieve nefarious objectives different from set company goals come under the purview of creative accounting. A corollary question therefore is: to what extent does creative accounting contribute to audit failure? Given that Creative Accounting is the transformation of financial accounting figures from what they actually are to what the management desire by taking advantage of the existing rules and/or ignoring some or all of them (Naser, 1993). This paper appraises the effect of creative accounting practices on audit failure in manufacturing firms in Nigeria. It adopts a survey research method polling a sample size of 200 (Taro Yameni formula) from a population of 600 senior audit staff of the big four audit firms in Nigeria and uses the Statistical Package for Social Sciences (SPSS 16 package, 2007) to test the hypothesis that : Creative Accounting has a significant positive impact on audit failure in Nigeria. This hypothesis was accepted at 5% level of significance. It was found that creative accounting practices have a positive significant effect on audit failure. The correlation coefficient R (0.616) indicates that there is a linear relationship between creative accounting practices and audit failure. The ANOVA table shows the overall significance of the model (F = 10.987, P = 0.004; P < 0.05. And the coefficient results are (t = 3.796, B = 0.358, P = 0.001; P < 0.05). It was therefore, recommended among other things that creative accounting practices should be legislated against and culprits held accountable.

Last modified: 2014-03-01 20:05:43