The Effect of Creative Accounting on Firms Financial Health - Thesis Proposal Example

The increased collapse of companies led to an increase in the number of legislation passed to protect businesses and the interests of shareholders (AICPA 6). This has led to an increase in creative accounting, which is the manipulation of financial statements by accountants using their knowledge, in a way that is within legal restrictions (Beidleman 655).

Without the rotation of auditors, and with accountants being under the command of managers, they can manipulate them to produce financial statements that do not portray the true and fair view of a firm’s financial performance (Hanno 135). There are various reasons advanced to explain why firms engage in creative accounting. These include a company trying to hide its poor performance in a particular year, or when it is avoiding takeovers (DeZoort, Hermanson, and Houston 179). Statement of the Problem Accounting standards has been revised to try to curb unethical issues in financial statement preparation and improve their integrity.

However, managers and accountants have found ways of navigating this regulation; remaining within the confines of the law, and producing a financial statement that does not reflect the actual position of a company. This has led to such companies experiencing financial strain and others collapse. Research Questions. What is the effect of creative accounting on the financial performance of a firm? ii. Is there a relationship between creative accounting and the collapse of firms? iii. What are the methods used in creative accounting?

Significance of the Study The purpose of this study is to find out the impacts that creative accounting has on a company’s financial health. The study will give an insight into the consequences of creative accounting and the negative effects the practice may have on a company’s ongoing and future performance. Literature Review Various scholars have studied different aspects of creative accounting. According to Beasley, creative accounting is used to influence market expectations and increase consumers’ and investors’ confidence in a firm (450).

Financial analysts use financial statements to value stock and this encourages managers to do creative accounting to purport improved earnings, which in the real sense are poor (Oyadonghan 131; Cohen and Hanno 143-4). Cormier researched the involvement of auditors in creative accounting and found that trust and loyalty between auditors and managers contribute to this (137). Vlad and Matis also came to the same conclusion in their study focused on relating creative accounting to corporate governance (332).

To curb the practice, Bazerman, Loewenstein, and Moore advocated for the rotation of audits in a firm (99). Bedard, Chtourou, and Courteau agreed with this recommendation arguing that it will discourage the formation of unhealthy relationships between managers and auditors (30). Methodology The research will use both quantitative and qualitative methods of collecting and analyzing data to establish the effect of creative accounting on the financial performance of a firm. Interviews and questionnaires will be used to obtain primary data while financial statements will be used to obtain secondary data. Statistical analysis will be used to conduct the analysis.