The Effect Of Creative Accounting On Shareholders’ Wealth In Listed Companies In Kenya

Abstract

The creative accounting practices are prevalent and attributed to bad corporate governance. Accountants apply strategies that enhance creative accounting by using profit eroding mechanisms which lead to drastic consequences. These include corporate scandals and collapse both international and locally as in the case of WorldCom and Enron. In Kenya, there are companies that over-report their financial performance to meet targets and please ever demanding shareholders. This highlights the existence of creative accounting. The current trend in the Kenyan investment is that companies indicating an increase in shareholders wealth attract more investment and thus increasing share capital. Various methods can be used to influence shareholders wealth as a way of attracting future investment; some may be legal or illegal. This study used a diverse research design; cross-sectional and explanatory research designs were adopted for primary data and time-series for collecting secondary data. This study therefore adopted mixed research design to ensure that the data collected and analyzed addresses the objectives of the study. The study comprised 64 companies listed on the NSE. The target population was comprised of all listed companies in Kenya. 35 questionnaires were distributed for this study but only 25 respondents provided their responses on time thus getting 71.4% response rate. The data was measured using frequency tables, weighted means, standard deviations and percentages and depicted using tables and bar charts as shown in the following sections. The period of study was from 2010 to 2015.The period acted as a pointer with regard to the recent financial crises. The researcher found that the independent variables explain 64.3% of the variance in the shareholders wealth. It’s very clear that these independent variables influence to a large extent the growth of shareholders wealth. It is therefore sufficiently to conclude that these variables significantly influence the growth of shareholders wealth given the unexplained variance is only 35.7%. The study recommends that local investors should embrace shareholder value concept as an excellent model for value creation to increase insider trading meant to boost investor confidence and sense of security as guaranteed by mutual interests in growth in shareholder value. Further research should be carried out on other employees who could be involved in creative accounting therefore indirectly affecting shareholders wealth.