EXAMINATION OF THE IMPACT OF BOOK ENTRIES ON CREATIVE ACCOUNTING: INTRODUCTION

INTRODUCTION

The topic of this study is the examination of the impact of Book Entries on Creative accounting. 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 (Naser1993). Then Book Entries according to Mulford and Comiskey (2002) refers to the double entries that are used to create inter alia future events. When fictitious revenue is recognized, a book entry is used because no real transaction exists, for example aggressive capitalization and extended amortization policies as well as the revaluation of assets and liabilities, are brought about by Book Entries. In like manner, when items in the income statement as well as the cash flow statement are reclassified, book entries are also used. Management uses book entries as strategic tools and in the long run, this may harm outside stakeholders and may result in material misstatements in the financial statements. Thus when financial statements are materially misstated with the use of book entries without being detected by the external auditor, they may give an inappropriate opinion.

In the United States, failure of corporations such as Enron Corp, WorldCom Inc., and Waste Management Inc, was also traced to the practice of Creative Accounting through the use of book entries which often go unnoticed by the auditors during their audit work. Thus, it would appear that a ‘properly’ done audit does not guarantee that serious distortions of the financial statement often described as creative accounting practices had not occurred. However creative accounting involves both income statement and balance sheet manipulations. The audit opinions of external auditors are fundamentally based on the outcome of their examination of both the income statement and the balance sheet. Copeland, (1968) views Creative accounting as involving the repetitive selection of accounting measurement or reporting rules in a particular pattern, which in effect report a stream of income with a smaller variation from trend than would otherwise have appeared. Barnea et al (1976) on the other hand view Creative Accounting as the deliberate dampening or fluctuation in some level of earnings considered to be normal for the firm. Though the advocates of this approach argue that it is a measure against the short- termism of judging an investment on the basis of the yields achieved in the immediate following years It also avoids raising expectations so high in good years that the company is unable to deliver what is required of subsequently. Again it is argued that if the trading conditions of a business are in fact volatile then inventors have a right to know this and that income smoothing may conceal long-term changes in the profit trend.

The professional accountant sees Creative Accounting generally as ethically dubious. In the USA, the then senior partner of Price Waterhouse observed: When fraudulent reporting occurs, it frequently perpetrated at levels of management above those for which internal control system are designed to be effective. It often involves using the financial statements to create an illusion that the entity is healthier and more prosperous than it actually is. This illusion is sometimes accomplished by masking economic realities through intentional misapplication of accounting principles.(Conner 1986)In Australia Leung and Cooper (1995) found that in a survey of one thousand five hundred (1500) accountants, the three ethical problems cited most frequently were conflict of interest, client proposal to manipulate accounts and client proposal for tax evasion, also two surveys of attitudes to creative accounting in USA both highlight a difference in accountants’ attitudes to creative accounting depending on whether it arises from abuse of accounting rules or from the manipulation of transactions.

In view of the foregoing, we ask the fundamental question; to what extent does companies in Nigeria use Book Entries as creative accounting techniques? We therefore state the tentative conjectural statement that there is a significant difference between the adjusted and the unadjusted ratios due to the use of Book Entries as creative accounting techniques in manipulating the information content of annual financial statements of companies in Nigeria’. By debunking the general believe that management’s creative accounting techniques centre around deferred tax and depreciation, we argue that management go far beyond deferred tax and depreciation to create complete and separate sets of accounting records as creative accounting techniques to manipulate accounting records to suit their selfish purpose.