EFFECTS OF CREATIVE ACCOUNTING PRACTICES ON AUDIT RISK AND AUDIT FAILURE IN NIGERIA

ABSTRACT

This study sought to examine the effect of creative accounting practices on the audit of financial statements. The conflict of interests within corporate firms has been largely linked with creative accounting behavior. Management may engage in fraudulent financial reporting to boost earnings and to present sound and stable financial performance. The independent opinion of the external auditors thus provides a reasonable assurance to the owners that the financial statements are free from material misstatements. In spite of this, financial reporting scandals and large case frauds have been reported in big business Corporations around the globe. External auditors have either failed to detect creative accounting techniques used or colluded with management to manipulate the financial statements. Book entries such as provisions and reserves were the common techniques used by the affected Corporations. Therefore, this study aimed at ascertaining the impact of creative accounting practice on audit failure; impact of creative accounting on audit risk; impact of provision for depreciation and deferred tax on firms’ performance. Using the responses from a sample of senior audit managers of the big four audit firms in Nigeria, the Pearson’s Chi Square method of data analysis was used to determine whether there is a significant association between creative accounting practice and audit risk and whether there is a significant association between creative accounting practice and audit failure. Also, ex-post factor design was used to extract a time series data for 10- year period from the  Nigerian Stock Exchange Fact Book to compute two (2) sets of ratios; Returns on equity and Long term debt to equity ratios. The provision for depreciation and deferred tax were reclassified while computing the ratios. The results were estimated using the Wicoxon Signed- Ranks methods of data analysis. The study found that creative accounting practice has a positive and significant effect on audit failure (X2C = 24.861> X2t  = 9.49; P < 0.05). Creative accounting practice has a positive and significant impact on audit risk (X2C = 14.139 > X2t = 9.49; P < 0.05). Provision for depreciation has a positive and significant impact on corporate performance (ZC  = 8.730 > Zt  = 1.96; P < 0.05) and  provision for deferred tax  has a positive and significant impact on corporate performance (ZC  = 8.224 > Zt  = 1.96; P < 0.05). These imply that creative accounting affect the audit of financial statements. The study therefore recommends that detection of creative accounting techniques should be given more attention by external auditors. Appropriate sufficient audit evidence should support audit opinion. Flexibility permissible by accounting standards should be minimized and those charged with governance should improve their oversight and monitoring roles.