According to Agency Theory, the firm is a legal fiction which serve as focus for complex process in which the conflicting objectives of individuals are brought into equilibrium within a frame work of contractual relations (Jenson and Meckling, 1976) A common form of agency relationship is that found between managers and shareholders in a firm. Managers are agents of shareholders who, as principals seek returns on their investment (Quinn and Jones, 1995). The normative implication is that managers maximize the net present value of the firm, which is supposed to be the shareholders gaol (Shankman, 1999). The conflicting objectives of the groups within and outside the firm usually results in self serving activities that are aimed at making one group better off without an intention to make the firm worse off. The managers are interested in paying lower taxes and dividends, the shareholders in gaining higher dividend, the employees to obtain better salary and higher profit share and the government to collect more taxes.

The conflict of interest often provides an incentives for creative accounting behavior; that is the tendency to manipulate accounting figures of the firm in order to meet the self serving objectives of the different stakeholders of the firm. Corporate firms operate not as separate legal entities, but rather constitute a ‘nexus of contracts’ between individuals (Jensen and Meckling, 1976). Therefore, within the agency framework, it is both logical and inescapable that management behavior will be self serving. Agency can, therefore provide a solid framework for understanding of creative accounting behavior. Thus, agency theory provides the logic and a solid framework to understand self-serving management behavior. However, it may provide an incomplete theoretical basis for explaining or predicting management behavior. As observed by Horrigan,(1987) the ethical dimension of human behavior may provide an important element missing from legalistic and adversarial agency relationships. In agent/ principal relationship, behavioral accountability is deeply rooted in what Iwu-Egwuonwu (2010) refer to as behavioral and ethical governance. It is a form of accountability. It is a form of accountability that should precede financial accountability because without it, no accountability is meaningful. However creative accounting involves both income statement and balance sheet manipulations. The examination of both the income statement and the balance sheet forms the basis upon which the external auditors provide audit opinion. This accounting manipulations which involve both income statement and balance sheet would be the focus of this research.

Merchant and Rockness (1994) similarly found that, when presented with scenarios of creative accounting, accountants were more critical of abuse of accounting rules than of manipulation of accounting transactions. Fischer and Rosenzweig (1995) gave two explanations for accountants’ attitudes thus, accountants may take a rule-based approach to ethics, rather on the impact of users of the accounts. Secondly they may see abuse of accounting rules as falling within their domain, therefore demanding their ethical judgment, while the manipulation of transactions falls within domain of management and so is not subject to the same ethical code. Another author Merchant and Rockness also found a difference in accountants’ attitudes to creative accounting depending on the motivation of management. Creative accounting based on explicit motives of self-interest attracted more disapproval than where the motivation were to promote the company. An accountant, or other manager, who takes a stand against creative accounting faces the same pressures as any other whistleblower. In extreme cases failure to act could ruin a reputation. As one company accountant who took a firm stand states in Baldo (1995) “It cost me my job, but I don’t think I would have gotten another job had I been unethical. Various research studies have examined the issue of management motivation towards creative accounting. Niskanen and Keloharju (2000) mentioned Tax as a significant motivator and also Herrmann and Inoue (1996) in a finished context in Japan .Other motivations for creative accounting as discussed by Healy and Wahlen (1999) include those provided when significant capital market transactions are anticipated, and when there is a gap between the actual performance of the firm and analysts’ expectations. A variant on income smoothing is to manipulate profit to tie in to forecasts.

In countries with highly conservative accounting systems the ‘income smoothing effect can be particularly pronounced because of the high level of provisions that accumulate. A report on how accounting policies in some companies are designed within the normal accounting rules, to match reported earnings to profit forecast. When these companies sell products a large part of the profit is deferred to future years to cover potential upgrade and customer support costs. This perfectly respectable and highly conservative accounting policy means that future earnings are easy to predict. Company directors may keep an income-boosting accounting policy change in hand to distract attention from unwelcome news. From management point of view, Healy (1985) examines managers’ earnings manipulations motives where executive compensation is linked to income measurement. On the other hand, Truemen and Titman (1988) discuss managers’ motivations to reduce the perception of variability in underlying economic earnings of the firm. In the case of Cadbury Nigeria plc, the managing director and the finance director were sacked on account of manipulating the company’s financial books. According to the company’s Public Affairs Manage, ”Over the number of years, Cadbury Nigeria (management) had assigned itself an ambitious growth target” (Okoye and Alao, 2008) Diana and Madalina (2008) identified the objectives of three major stakeholders in the firm as the main motivations for account manipulation. They identified managers of the firm, the fund providers and the society as major stakeholders in the firm. The managers seeking to maximize their compensations, minimize the firm’s cost of capital and the cost of taxations and its contribution to the society; engage in account manipulation to achieve these objectives

Accounting concentrates on the events, transactions and occurrences that can be described as resources as resource flows. Flows necessarily involve a certain dualism, in other words a source and a destination. Therefore record keeping is “depicting a conceived, rather than a fully perceived, flows of resources” (Goldberg 2001). Two possible dimensions are clearly distinguished here, “conceived”, which refers to a creation of the mind and “perceived”, which relates to observing reality. Accounting is the result of the procedures that have been installed to record invents, occurrences and transactions that have taken place and decisions that have been taken. They involve change in location, time and condition and may also be anticipated or predicted, but they only become actual occurrences when they do happen. In this case, there is no question of reality. The future happenings are made up, a product of the mind. The balance sheet therefore involves a backward as well as a forward.