The Impact of Creative Accounting on Organizational Effectiveness: A Study of Manufacturing Firms in Nigeria

Abstract

Creative accounting involves the manipulation of company financial records towards a predetermined target. This target can be motivated by a preference for more stable earnings. The purpose of this study therefore is, to determine if creative accounting has any influence in enhancing the effectiveness of an organization. Prior studies were reviewed to develop our hypotheses. The study uses survey data and financial reports on fourteen manufacturing firms over five year period to examine whether creative accounting and organizational effectiveness has any significant relationship. Using correlation statistics, all the hypotheses were found to be statistically significant and positively correlated. However, we found weak evidence of a positive correlation between income smoothing, artificial transaction and market share. These results are sensitive to our apriori expectation but we believe they may not be consistent over time. The study concludes that many manufacturing firms in Nigeria underperform but practice creative accounting to appear legitimate. We therefore recommend that IFRS should be adopted in Nigeria to eliminate judgment estimation in accounting treatment of certain items.