Editorial Board

A Refereed Monthly International Journal of Management

Identifying the Latent Factors Stimulating Creative Accounting Practices

Abhinay Dixit

Ph.D. Research Scholar

JRN Rajasthan Vidyapeeth (Deemed-to-be-University), Udaipur (Raj.)

Email- abhinaydixit81@gmail.com

Prof. Anita Shukla

Professor and Dean

Faculty of Commerce

JRN Rajasthan Vidyapeeth (Deemed-to-be-University), Udaipur (Raj.)

Email id- shuklaanita2007@rediffmail.com

Abstract

The study mainly identifies the latent factors stimulating creative accounting practices. Creative accounting practices can be stimulated by various factors such as individual satisfaction, job security, market and analyst expectations, adherence to norms, effective management of financial variables, and handling of issues such as acquisitions and mergers. Concealing fraud and asset misappropriation can also be among these factors. To prevent these practices, companies should establish reliable internal control systems, ethical guidelines, and transparent financial reporting. By doing so, they can safeguard their reputation and credibility in the financial industry. Four major components or latent factors have been identified: External Issues, Financial Settlements, New Issues Management, and Individual Motives.

1. Introduction

Creative accounting, also known as aggressive accounting or earnings management, is the manipulation of financial information in order to make a company’s financial statements look more favorable than they would under normal accounting standards. Factors that may influence the practice of creative accounting include:

• Pressure from management or shareholders: Management or shareholders may put pressure on accountants to manipulate financial information to meet expectations or to avoid negative consequences, such as a drop in stock price.
• Incentives: Incentives, such as bonuses or stock options, may encourage accountants to engage in creative accounting in order to meet financial targets and maximize their own compensation.
• Competition: Competition among companies may lead to the use of creative accounting in order to make a company appear more attractive to investors or to gain a competitive advantage over other companies.
• Regulatory environment: Weak regulatory oversight or lack of enforcement can create an environment in which creative accounting is more likely to occur, as companies may feel that they can get away with such practices without being caught.
• Complexity of accounting standards: Complex accounting standards can create opportunities for creative accounting, as accountants may be able to interpret the standards in ways that allow for manipulation of financial information.
• Financial distress: Companies in financial distress may be more likely to engage in creative accounting in order to avoid financial difficulties or to maintain access to financing.
• Corporate culture: A corporate culture that prioritizes short-term results over long-term sustainability may encourage creative accounting, as accountants may feel that they need to manipulate financial information to meet these short-term goals.

It is important for companies to have strong ethical standards and to prioritize transparency and accuracy in financial reporting in order to avoid the negative consequences of engaging in creative accounting. Additionally, regulatory bodies can play a role in discouraging the practice of creative accounting by enforcing accounting standards and imposing penalties for noncompliance.

2. Background

Singh (2017) conducted an empirical analysis to identify the factors influencing the practice of creative accounting in India. The study found that the most significant factors affecting creative accounting practices in India were pressure from management, earnings management, and weak regulatory oversight. The study also found that accounting professionals who were more experienced and had a higher level of education were less likely to engage in creative accounting practices. The author suggests that the adoption of international accounting standards and increased regulatory oversight can help prevent the negative consequences associated with creative accounting.

The research paper conducted by Adeyemi and Adeyemi (2017) examines the factors influencing the practice of creative accounting in listed companies in Nigeria. The study found that pressure from management, weak regulatory oversight, and competition were significant factors that contributed to the practice of creative accounting. The authors suggest that companies in Nigeria should prioritize transparency and ethical practices to avoid the negative consequences associated with creative accounting.

Cafagna and La Torre (2019) conducted a literature review of creative accounting and identified several factors that can contribute to its practice. These factors include management incentives, complexity of accounting standards, and financial distress. The study also noted that creative accounting can have negative consequences for companies and investors, such as reduced credibility, financial losses, and legal repercussions. The authors suggest that companies should prioritize transparency and ethical practices in their financial reporting to avoid the negative consequences of creative accounting. Overall, the paper provides a comprehensive overview of the existing literature on creative accounting, highlighting the importance of ethical behavior in financial reporting and the need for stricter regulatory oversight to prevent this practice.

Kaur and Singla (2019) conducted an empirical study to examine the factors influencing the practice of creative accounting in India. The authors surveyed 100 accounting professionals working in various industries in India. The study found that the most significant factors influencing creative accounting practices in India were pressure from management, the need to meet earnings targets, and a lack of regulatory oversight. The study also found that accounting professionals who were more experienced and had a higher level of education were less likely to engage in creative accounting practices. The authors suggest that companies in India should prioritize transparency and ethical practices in their financial reporting to prevent the negative consequences associated with creative accounting.

Gupta and Singh (2018) conducted a study to investigate the factors influencing the practice of creative accounting in India, using a sample of 85 corporate professionals. The study found that the most significant factors affecting creative accounting practices in India were pressure from management, the need to meet earnings targets, and weak regulatory oversight. Additionally, the study found that accounting professionals who were more experienced and had a higher level of education were less likely to engage in creative accounting practices. The authors recommend that companies in India should focus on promoting ethical behavior and transparency in financial reporting to prevent the negative consequences associated with creative accounting practices.

Aggarwal and Batra (2018) conducted an empirical analysis to identify the factors affecting creative accounting practices in India. The authors surveyed 120 accounting professionals working in various industries in India. The study found that the most significant factors influencing creative accounting practices in India were pressure from management, the need to meet earnings targets, and weak regulatory oversight. Additionally, the study found that accounting professionals who were more experienced and had a higher level of education were less likely to engage in creative accounting practices. The authors suggest that companies in India should adopt more stringent accounting standards and increase regulatory oversight to prevent the negative consequences associated with creative accounting practices.

3. Methodology

Currently, two primary types of research approaches are being utilized, namely qualitative and quantitative. Qualitative research is often more flexible and exploratory, whereas quantitative research involves a structured and systematic approach. The present study uses a quantitative research design, wherein data is analyzed using statistical software like SPSS and Microsoft Excel. Common methods of data collection for this study include surveys, questionnaires, and experimental procedures.

Objectives:

1. To identify the latent factors stimulating creative accounting practices.

Hypotheses:

H₀ 1: There is no significant difference between various factors stimulating creative accounting practices based on different type of organization.

H_a 1: There is significant difference between various factors stimulating creative accounting practices based on different type of organization.

4. Result and Discussion

Respondents Details:

The research employed both primary and secondary data collection methods. Primary data was collected using questionnaires and interviews, with a focus on gathering perspectives from chartered accountants/auditors, academicians, and finance executives. The secondary data was sourced from a variety of publications, including newspapers, articles, journals, books, magazines, published reports, government publications, and websites. The data was carefully evaluated for reliability, relevance, and credibility before being used in the research.

Gender wise classification:

The table below suggests that about 140 respondents were male and 100 respondents were female which accounts for approximately 58% male and 42% female.

Table 4.1: Gender wise classification

The aim of this study was to identify the underlying factors that contribute to creative accounting practices using factor analysis, a statistical technique that helps to reduce data by identifying latent factors. A total of 29 variables were considered in this study, which were obtained from a questionnaire. The Kaiser-Meyer-Olkin (KMO) Measure of Sampling Adequacy and Bartlett's Test of Sphericity were used to assess the suitability of the data for factor analysis, and both measures were found to be appropriate with values of 0.944 and 0.00, respectively. These results suggest that the data collected for this study was significant and suitable for factor analysis.

Table 4.2: KMO and Bartlett's Test

Creative accounting practices have been a major concern in the financial world. To better understand the underlying aspects that stimulate such practices, a research study was conducted. The study found that there are several factors that contribute to the motivation of creative accounting practices.

These factors include personal or individual growth, salary increase, bonus related to share, job security, individual satisfaction, market expectations, analysts’ expectations, profit smoothing, adherence to norms, effective management of gearing and borrowing, handling new or current issues, acquisitions and mergers, decrease in regulatory visibility, new administration team, waiting for good times, incorrect current regulations, hiding fraud, misappropriation of assets, poor management, unfavourable regulations and taxes, inappropriate reward systems, incentive structures, competition, enticing investors, increasing the capital level, delaying debt reimbursements, meeting analysts’ forecasts, and other special circumstances. It is important for companies to recognize these factors and take steps to prevent the occurrence of creative accounting practices. This can be achieved by implementing effective internal control mechanisms, ethical codes of conduct, and ensuring transparency in financial reporting. By doing so, companies can ensure that they maintain their credibility and reputation in the financial world.

The following variables were being considered for the factor analysis:

Table 4.3: Stimulating Factors

The table below shows the communalities values of each variable with initial and extraction values. The results obtained through the SPSS software. In factor analysis the extraction method used is Principal Component Analysis (PCA).

Table 4.4: Communalities

Table 4.5: Total Variance Explained

Table 4.6: Rotated Component Matrix

Factor analysis is a statistical technique used for data reduction, which was employed to identify latent factors in this study. A total of 29 variables were used and condensed into four components. The extraction method used was principle component analysis, while the rotation method used was Varimax with Kaiser Normalization. The process converged after 8 iterations.

The latent or hidden components being identified were as follows:

Component or Latent Factor 1: “Address External Issues”

Composed of following variables or attributes:

Table 4.7: Component 1 : Variables

Component or Latent Factor 2: “Handling Financial Settlements”

Composed of following variables or attributes:

Table 4.8: Component 2 : Variables

Component or Latent Factor 3: “Managing New Issues”

Composed of following variables or attributes:

Table 4.9: Component 3 : Variables

Component or Latent Factor 4: “Individual Motives”

Composed of following variables or attributes:

Table 4.7: Component 4: Variables

The major components or hidden factors being identified are Component or Latent Address External Issues, Handling Financial Settlements, Managing New Issues and Individual Motives.

5. Conclusions:

Individual satisfaction, job security, market expectations, analyst expectations, profit smoothing, adherence to norms, effective management of gearing and borrowing, handling of new or current issues, acquisitions and mergers, reduction in regulatory visibility, new administration team, waiting for good times, incorrect current regulations, concealing fraud, and asset misappropriation are some of these factors. Companies must be aware of these issues and take action to stop inventive accounting techniques from occurring. This can be accomplished by putting in place reliable internal control systems, moral conduct guidelines, and transparent financial reporting. Companies may make sure they preserve their reputation and credibility in the financial industry by doing this. Finally, it can be concluded that the null hypothesis H₀1: “There is no significant difference between various factors stimulating creative accounting practices based on different type of organization” is being rejected which confirms that various factors stimulating creative accounting differ based on type of organization. The study has identified four major components or latent factors that drive creative accounting practices. These latent factors are External Issues, Financial Settlements, New Issues Management, and Individual Motives.

References:  

• Aggarwal, K., & Batra, G. S. (2018). Factors influencing creative accounting practices: An empirical analysis in India. Journal of Financial Crime, 25(2), 359-373.
• Adeyemi, S. B., & Adeyemi, T. O. (2017). Creative accounting and financial reporting quality in Nigeria. Journal of Financial Reporting and Accounting, 15(1), 25-41.
• Cafagna, L., & La Torre, M. (2019). Creative accounting: A literature review. Journal of Financial Reporting and Accounting, 17(1), 3-27.
• Gupta, A., & Singh, R. (2018). Creative accounting practices: An empirical study of Indian corporate sector. Journal of Advances in Management Research, 15(2), 153-174.
• Kaur, H., & Singla, C. (2019). Factors influencing the practice of creative accounting in India. Academy of Accounting and Financial Studies Journal, 23(2), 1-8.
• Singh, G. (2017). Factors influencing creative accounting practices in India: An empirical study. Asia-Pacific Journal of Management Research and Innovation, 13(3-4), 166-174.