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ASSESSING THE EFFECT OF CREATIVE ACCOUNTING ON

CORPORATE PERFORMANCE: A CASE OF SELECTED LISTED

COMMERCIAL BANKS ON THE GHANA STOCK EXCHANGE

Albert Mensah

, Ruth Ruby

, Daniel Osei

, Abdul Wahab Atta Bashiru

, Oscar Agyemang

Opoku

Mankranso Business Resource Centre, Ghana

Methodist University College, Ghana

3,5

University of Cape Coast, Ghana

University of Northampton, United Kingdom

Email: albmen[email protected], [email protected] [email protected], [email protected]

[email protected]cc.edu.gh

Abstract

The study examined the effect of creative accounting on the performance of commercial banks listed on the Ghana

Stock Exchange. The research design chosen for this study is an ex-post facto research design, which involves

examining facts that have already occurred without any interference. The research approach adopted is

quantitative, focusing on objective measurements and statistical analysis of data collected through surveys. The

study relies on secondary data, specifically financial reports of deposit money banks listed on the Ghana Stock

Exchange. The target population includes all the listed commercial banks on the exchange. The sample size

consists of 8 out of the 9 commercial banks selected based on their up-to-date financial reports. The data analysis

was done with the aid of SPSS software, employing descriptive and inferential statistical techniques such as

multiple regression was used to determine the cause-and-effect relationship among variables. The study found

that there was a strong positive link between a bank's size, creative accounting, and sales growth and its return on

assets and return on equity. Also, SIZE and SG positively affect the profitability (ROA and ROE) of the listed

firms on the GSE. However, Creative Accounting negatively affects profitability (ROA and ROE). Therefore,

commercial banks should be critical regarding on issues or items that they classified under creative accounting.

Also, commercial banks should develop strategies to lure many shareholders to invest in the banks to improve

upon their performance. Moreover, there is an urgent need for monitoring companies’ activities to raise the quality

of financial reporting in Ghana. This can be achieved in determining which accounting manipulation is kept within

the limits of legality. Lastly, commercial banks should strengthen their internal control systems in order to deal

with issues of creative accounting and misleading financial reports.

Keywords: Evaluation, Creative Accounting, Corporate Performance

INTRODUCTION

Financial accounting reports are meant to provide financial information so that

stakeholders and other users of such information can use it for informed decision. Therefore,

accuracy and reliability of such reports are crucial for these people in order to make appropriate

decisions. This fact has become more important in recent years starting from 2001 by the

collapse of Enron and its importance intensified with the recent financial crisis because of the

bankruptcy of major financial institutions. Complexity and unpredictability of constantly

changing environment makes it difficult to consider all possible situations in advance when

setting standards. Even if the accounting standards cannot prevent manipulative behavior in

advance, they can curb it afterwards (Wang, 2008).

Creative accounting and earnings management are euphemisms referring to accounting

practices that should follow the letter of the rules of standard accounting practices, but certainly

deviate from the spirit of these rules. According to Asuquo, (2011), they are characterized by

excessive complication and the use of novel ways of characterizing income, assets or liabilities

Injuruty: Interdiciplinary Journal and Humanity

Volume 3, Number 1, January 2024

e-ISSN: 2963-4113 and p-ISSN: 2963-3397

Assessing The Effect of Creative Accounting on Corporate Performance: a Case of Selected Listed

Commercial Banks on the Ghana Stock Exchange

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and the intent to influence readers towards the interpretations desired by the authors. The terms

“innovative” or “aggressive” are sometimes used. However, inadequate or misleading income

disclosure may result when income is deliberately and artificially smoothed (Nur Husna, Tan,

Md Shukri, Mohd Ashari, & Wong, 2022). The effect of creative accounting may lead

shareholders and investors to have inadequate information when evaluating organizations

effectiveness.

For instance, in the United States, Enron company which grew in just 15 years to be

America’s seventh largest company went underground after it was discovered that the company

has been fiddling with profit figure (Amatorio, 2005). There are many reports of price

manipulation, profit overstatement, and accounts falsification by some dubious stewards which

rendered the financial reporting ineffective. This represents the transformation of the

accounting figures from what they are in accordance with the economic reality into what the

managers want using the advantages of the existing regulations and/or ignoring some of them.

Okoye Emma & James Obioma, (2020) put it in his so-called bible of the business world

“Creative Accounting:” “It is the biggest con trick since the Trojan horse. They are of the

opinion that Creative accounting is the root of numerous accounting scandals. But real-world

experience reveals that it is in most cases practiced in an undesirable way to attract investors

by presenting an exaggerated financial report. Thus, two perspectives of this term may be

identified. The first one recognizes genuine changes in the business accounting practices while

the second one reflects undesirable window-dressing that tends to distort financial information.

According to the creative accounting theories, there is a connection between the use of creative

accounting techniques and managers’ incompetence. A company that has reached an unstable

situation will undoubtedly begin to use creative accounting techniques in order to artificially

increase profit, and thus, the financial situation to be temporarily concealed. This theory

according to Micah & Chinwe, (2014) is that incompetent managers try to hide the lack of

performance by using creative accounting techniques, which leads to the idea that sometimes,

creative accounting may be associated with failure of the company and to postpone the “fatal”

day. Creative accounting was among the major factors that resulted in the recent banking crisis

in Ghana. Therefore, this study is to examine the effect of creative accounting on corporate

performance.

According to Shibley, (2018) creative accounting or financial statement fraud remained

one of the most controversial and unresolved issues in corporate finance. Creative accounting

and long-term survival were practices that tended to manipulate the rules of standard

accounting practices or the spirit of those values. Accounting practice and scandal could

destroy any organization; therefore, there was the need to restore integrity and public

confidence to accounting operations. They were characterized by dubious complications and

use of „novel‟ (work of fiction) ways of presenting income, assets and liabilities. References

to creative accounting or false financial statements were increasingly frequent over the last few

years.

Falsifying financial statements primarily consisted of manipulating elements by

overstating assets, sales and profit, or understating liabilities, expenses and losses. The

company failures of the past decade however, had been closely associated with financial

statement frauds, which involve a number of parties, the management and board of directors

(Shibley, 2018). Akenbor & Ibanichuka, (2012) asserted that current accounting practices

allowed a degree of choice of policies and professional judgment in determining the

measurement method and criteria of recognition. This involved a deliberate non-disclosure of

information and manipulation of accounting figures, thus made the firm appeared to be more

profitable (or less profitable for tax purposes) and financially stable than it was supposed to be.

Bhasin, (2016) examined on detecting creative accounting practices and their impact on

the quality of information presented in the financial statements in Romania. They noted that;

Assessing The Effect of Creative Accounting on Corporate Performance: a Case of Selected

Listed Commercial Banks on the Ghana Stock Exchange

https://injurity.pusatpublikasi.id/index.php/in

the insufficiency of accounting regulations and the on-going process of harmonization that in

the end, translated into a freedom of decision permitted by every regulatory body, were a series

of factors that encouraged the proliferation of accounting creativity. Experience showed that

every time a new regulation was issued, entities found a way to minimize its impact. Therefore,

no matter how many rules of the profession were implemented, there would always be persons

who would find a way to „beat‟ the system.

Imo, (2022) who carried out research in Nigeria examined the contribution of creative

accounting on economic development noted that modern organized sophisticated corporate

fraud had been on the increase. Ilter, (2016) established those severe consequences resulted

when companies committed financial statement fraud, including bankruptcy, significant

changes in ownership and suspension from trading in national exchanges. Most business

organizations that had always been connected with creative accounting or financial statement

fraud had always been affected by financial collapses leading to collapse or liquidation of the

companies.

There had been minimal studies on how creative accounting practices affect performance

of commercial banks. In Ghana, few empirical studies had been carried out to establish the

relationship between creative accounting and corporate performance of firms. It is at the

backdrop of this that the study sought to fill this gap in Ghanaian literature by considering the

effect of creative accounting on the performance of commercial banks listed on the Ghana

Stock Exchange. This permitted the study to; examine the effect of creative accounting on

listed commercial banks’ performance; evaluate the effect of creative accounting on listed

commercial banks’ performance; assess the effect of size on listed commercial banks’

performance; and assess the effect of SG on listed commercial banks’ performance.

RESEARCH METHOD

The research design chosen for this study is an ex-post facto research design, which

involves examining facts that have already occurred without any interference. The research

approach adopted is quantitative, focusing on objective measurements and statistical analysis

of data collected through surveys. The study relied on secondary data; specifically financial

reports of deposit money banks listed on the Ghana Stock Exchange. The target population

includes all the listed commercial banks on the exchange. The sample size consists of 8 out of

the 9 commercial banks selected based on their up-to-date financial reports. The sampling

technique used is purposive sampling, selecting elements from the population that suit the

purpose of the study. With the aid of SPSS software, the data analysis was mainly quantitative,

employing descriptive such means, standard deviations and inferential statistical techniques

such as multiple regression was used to determine the cause and effect relationship among

variables.

RESULT AND DISCUSSION

This part of the study analyses and discusses the results from various tests which tests

aim at finding answers to research questions as set out in this study. Thus, to examine the effect

of creative accounting on the performance of commercial banks listed on the Ghana Stock

Exchange. Basically, it was presented in two themes: descriptive statistics and inferential

statistics that covered the research objectives.

Assessing The Effect of Creative Accounting on Corporate Performance: a Case of Selected Listed

Commercial Banks on the Ghana Stock Exchange

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Table 1: Descriptive Statistics

Mean

Standard Deviation

ROA

2.3240

2.22489

ROE

2.5612

1.09232

SIZE

22.1065

0.63274

0.1761

0.32189

1.9821

0.12782

Source: Financial Statement of selected banks (2015-2020)

The Table 1 shows the descriptive statistics for the data set used for the study. The

descriptive statistics describe the basic features of the dataset. From Table 1.0, the mean return

on asset (ROA) of banks listed on the Ghana Stock Exchange is 2.3240. This means the average

bank listed on the GSE has an ROA of 2.3240 with a deviation of 2.22489. From table, the

ROE of banks listed on the GSE is 2.5612. The average sales growth rate of banks listed on the

GSE is 0.1695. This translates into some 17.61%. This is quite good. Moreover, Firm Size was

averagely 22.10 with a deviation of 0.63. lastly, the Creative Accounting was averagely 1.98.

This tells the deviation between the actual reporting values and the falsification or fabricated

reported values.

Table 2: Correlational Matrix of the variables

ROA

ROE

SIZE

ROA

1.000

0.341

.362

.354

-.161

ROE

0.341

1.000

.045

1.000

-.179

SIZE

.362*

.231

1.000

.045

-.215

.354*

.351

.045

1.000

-.179

-.161

-.341

-.215

-.179

1.000

(Source: Financial Statement of selected banks- 2015-2020) * p-value 0.05 (significance)

Table 2 summarizes the strength and nature of the relationship between the study's

variables. As can be seen from the Table 2, comparing a variable to itself results in a perfect

correlation. The direction of the link is indicated by the sign against the figures, whilst the

intensity of the link is indicated by the values. A positive sign indicates that the variables have

a positive association, implying that they move in the same direction. A minus sign indicates

that the variables are moving in the opposite direction. As shown in Table 2, the correlation

coefficient between ROA and size is 0.362, indicating that the size and ROA of banks listed

on the GSE move in the same direction.

However, 0.362 means that the relationship is weak. The correlation between ROA and

ROE and CA is -0.161 and -0.341. This means that ROA, ROE and CA of banks on the GSE

move in opposite directions, thus, a weak relationship among the variables. From Table 2, the

correlation between ROA and sales growth of banks listed on the GSE is 0.354. This depicts a

weak positive relationship between sales growth and ROA.

This result was contrary to that of Konadu (2009) who examined the relationship between

liquidity and profitability using selected commercial banks on the GSE. He found that there

was a negative relationship between liquidity and profitability. Similarly, Moein-Addin (2013)

investigated the relationship between liquidity measures and firm stock returns listed on the

Tehran Stock Exchange and found positive relationship between liquidity and profitability.

Table 3: Model Summary

R-Square

Adjusted R-Square

Std. Error of the Estimate

Durbin-Watson

.651

.62

.59

1.87222

1.560

(Source: Financial Statement of selected banks 2015-2020)

According to Table 3, the R value of 0.651 demonstrates the existence of a link between

the dependent and independent variables (all put together). Thus, there is a strong positive link

Assessing The Effect of Creative Accounting on Corporate Performance: a Case of Selected

Listed Commercial Banks on the Ghana Stock Exchange

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(0.651) between a bank's size, creative accounting and sales growth (all of which are

independent factors) and its return on assets and return on equity (dependent variable).

The R-square indicates how much variance occurs in the dependent variable as a result

of the independent factors. As a result of the findings, there is a 59 percent difference in the

return on assets and return on equity of banks listed on the Ghana Stock Exchange (GSE), as

well as in their creative accounting, size, and sales growth. The residual accounts for the

remaining 41 percent of the difference in the return on assets of banks listed on the GSE. The

Adjusted R value of 59 percent accounts for variance in the return on assets and return on

equity of banks listed on the GSE that is explained by an adjustment to an independent variable

in the regression model or equation. The Durbin Watson statistic of 1.560 indicates that there

is no autocorrelation between the residuals in the regression model or equation, as it is larger

than 1.5 but less than 2.5. Autocorrelation is detrimental to the performance of linear regression

models.

Table 4: ANOVA Results

Model

Sum of Squares

Mean Square

Sig

Regression

75.547

18.887

12.325

0.003

Residual

116.359

3.325

Total

191.906

a. Dependent variable: ROA, ROE

b. Predictors: (Constant), SG, SIZE, CA

The ANOVA Table 4 indicates whether the variation in return on assets of banks listed

on the GSE can be explained by a regression model or equation. The F-statistic of 12.325 has

a sig value of 0.003. We reject the null hypothesis in favor of the alternate hypothesis because

this value is less than 0.05. In conclusion, the return on assets of banks listed on the GSE is

explained by their creative accounting, size, and sales growth.

Table 5: Multicollinearity of the variables

Variable

Tolerance

VIF

SIZE

.842

1.012

.790

1.218

.981

1.445

Source: Financial Statement of selected banks (2015-2020)

The Tolerance and VIF (Variance Inflation Factors) from the collinearity diagnostic

section can be used to analyze the test of multicollinearity. Due to the fact that all tolerance

values are more than 0.10, there is no evidence of multicollinearity among the independent

variables (Table 6). Additionally, the VIF demonstrates that there is no multicollinearity across

the independent variables, as all VIF values are less than 10. In conclusion, the independent

variables do not exhibit a high degree of correlation with one another.

Table 6: Effect of Creative Accounting on ROA

Unstandardized

Coefficients

Standardized

Coefficients

t-test

value

Std.

Error

Beta

(Constant)

-32.820

10.799

3.039

.004

SIZE

1.590

.476

.454

3.337

.002

1.482

1.004

.211

1.477

.049

-.195

.214

-.132

-.912

.038

Source: Financial Statement of selected banks (2015-2020)

Assessing The Effect of Creative Accounting on Corporate Performance: a Case of Selected Listed

Commercial Banks on the Ghana Stock Exchange

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The study's purpose is to determine effect of CA on ROA, the study employed

standardized coefficients. As can be observed from the Table 6, size as defined by natural total

assets has a statistically significant effect on the ROA of banks listed on the GSE, as does

creative accounting and sales growth. This is because the sig values of all of these variables

are less than 0.05.

Estimating the Final Regression Equation Model becomes

ROA = -32.820 + 1.482SIZE + 1.482SG -.195CA + ε

According to the equation above, a unit increase in the size of a bank results in a 1.59

rise in its profitability. That is, the larger a bank is, the higher its ROA. With all other variables

remaining constant, a unit change in a bank's sales growth rate situation results in a 1.48 rise

in its profitability (ROA). Finally, if all other variables remain constant, a unit change in a

creative accounting result in a 0.195 fall in the bank's profitability (ROA).

Moreover, standardized coefficients of the result shows that SIZE and SG positively

affect the profitability (ROA) of the listed firms on the GSE. However, Creative Accounting

negatively affect the profitability (ROA) of the listed firms on the GSE. These relationships

were statistically significant.

On firm size, Abeyrathna & Priyadarshana, (2019) explored the relationship between

firm size and profitability in the Nigerian manufacturing industry by utilizing data from that

industry between 2005 and 2012. The study found that there was a positive effect of firm size

on profitability. This study is in line with Akinyome and Adebayo (2013). Similarly, work done

by Islik et al. (2017) was an examination of the effect of the size of a corporation on profitability

in the Turkish manufacturing sector and the findings indicated that there was a positive effect

of firm size on profitability.

Table 7: Effect of Creative Accounting on ROE

Unstandardized

Coefficients

Standardized

Coefficients

t-test

p-value

Std. Error

Beta

(Constant)

-18.134

12.201

-4.218

.001

SIZE

1.223

.476

.454

2.431

.011

1.561

1.004

.211

2.341

.003

-.132

.342

-.403

-.672

.012

Source: Financial Statement of selected banks (2015-2020)

Objective two was to examine the effect of creative accounting on the performance of

listed firms on the GSE. As can be observed from the Table 7, size as defined by natural total

assets has a statistically significant effect on the ROE of banks listed on the GSE, as does

creative accounting and sales growth. This is because the sig values of all these variables are

less than 0.05.

Estimating the Final Regression Equation Model becomes

ROA = -18.134 + 1.223SIZE + 1.561SG -.132CA + ε

According to the equation above, a unit increase in the size of a bank results in a 1.223

rise in its profitability. That is, the larger a bank is, the higher its ROE. With all other variables

remaining constant, a unit change in a bank's sales growth rate situation results in a 1.56 rise

in its profitability (ROE). Finally, if all other variables remain constant, a unit change in a

creative accounting result in a 0.132 fall in the bank's profitability (ROE).

Moreover, standardized coefficients of the result shows that SIZE and SG positively

affect the profitability (ROE) of the listed firms on the GSE. However, Creative Accounting

negatively affect the profitability (ROE) of the listed firms on the GSE. These relationships

were statistically significant. These findings were similar to the following empirical studies:

Micah & Chinwe, (2014) examined whether creative accounting and organisational

Effectiveness has any significant relationship, using correlation statistics, all the hypotheses

Assessing The Effect of Creative Accounting on Corporate Performance: a Case of Selected

Listed Commercial Banks on the Ghana Stock Exchange

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were found to be statistically significant and positively correlated. However, they found weak

evidence of a positive correlation between income smoothing, artificial transaction and market

share. Ijeoma & Prisca, (2014) examined the effect of creative accounting on the Nigerian

banking industry and attributed the major reason for creative accounting practices in the

Nigerian banking industry inflating the operating costs to reduce taxable profits.

Tassadaq & Malik, (2015) empirically and essentially investigated the problem of

creative accounting in financial reporting. Both descriptive and inferential statistics were used

to simplify the results and concluded the findings. The finding revealed that creative accounting

plays significant role in financial reporting but has been negatively correlated, which implies

that the higher the number of managers involved it, the lower the value of financial information

disseminated to investors and other users.

Tunji, Benjamin, Bintu, & Flomo, (2020) examined creative accounting and firms’

financial performance using seasonal trading reports. The findings showed that seasonal

trading reports had no significant relationship with Return on Assets (ROA), Return on Equity

(ROE) and Earnings Per Share (EPS) and not used to manipulate ROA, ROE and EPS. Seasonal

trading report had negative relationships with performance variables and they concluded that

an increase in seasonal trading report decreases performance. While Nangih, (2017) examined

empirically the effect of creative accounting practices on the quality of financial statements of

oil servicing companies in Nigeria using ordinary least squares regression techniques. Results

of the findings revealed that creative accounting practices by oil servicing companies

influenced the quality of their financial statements negatively.

CONCLUSION

There was a strong positive link among a bank's size, creative accounting and sales

growth (all of which are independent factors) and its return on assets and return on equity

(dependent variable). Also, SIZE and SG positively affect the profitability (ROA and ROE) of

the listed firms on the GSE. However, Creative Accounting negatively affect the profitability

(ROA and ROE) of the listed firms on the GSE. Therefore, ccommercial banks should be

critical regarding on issues or items that they classified under creative accounting. Also,

commercial banks should develop strategies to lure many shareholders to invest in the banks

in order to improve upon their performance. Moreover, there is urgent need for monitoring

companies’ activities in order to raise the quality of financial reporting in Ghana. This can be

achieved in determining which accounting manipulation is kept within the limits of legality.

Lastly, commercial banks should strengthen their internal control systems in order to deal with

issues of creative accounting and misleading financial reports. For future studies, this study

found that Creative Accounting negatively affect financial performance of listed commercial

banks on the GSE in Ghana. Therefore, other researchers can consider other sectors or industry

listed on the Ghana Stock Exchange to examine the relationship between creative accounting

and their performance. Also, others can consider the effect of creative accounting on

investment of listed firms on the Ghana Stock Exchange.

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Commercial Banks on the Ghana Stock Exchange

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Albert Mensah, Ruth Ruby, Daniel Osei, Abdul Wahab Atta Bashiru, Oscar

Agyemang Opoku (2024)

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