Effect of Management Practices on Creative Accounting among Corporations Listed at the Nairobi Securities Exchange

Abstract

The purpose of this thesis was to determine the management practices influencing creative accounting among listed on the Nairobi Securities Exchange (NSE) in Kenya. The study analyzed the effect of manager’s compensation, contractual obligations, tax management, Share price performance management and insider dealings on creative accounting. The study was based on the existing theories, more so on the positive accounting theories, which were used to identify these accounting practices. Systematic sampling method was applied in selecting the sample for the study. The research design used in this study was a cross sectional survey design which assessed data for the year 2014. Secondary data was extracted from the annual financial reports for the respondent companies, NSE database, journals and other publications. Primary data was acquired through administering questionnaires and interviews to a sample of managers, accountants and internal auditors of companies publicly listed on the NSE. A sample of thirty nine out of a target population of sixty four Companies publicly listed was extracted from the Nairobi Securities Exchange website. A pilot test on a different sample gave a Cronbach’s alpha greater than 0.8 for all the variables. Data analysis was by descriptive statistics and inferential statistics using Statistical Packages for Social Sciences (SPSS). Analysis of variance (ANOVA) was used to establish the level of statistical significance of difference between the observed and expected values. Regression analysis was used to estimate the model coefficients while Pearson coefficient of correlation was used to establish the strength of relationship among the variables, Test of hypothesis was also carried out. The results indicated that manager’s compensation, contractual obligations, tax management and insider dealings have significant effect on creative accounting. Share price performance management on the other hand had no significant influence on creative accounting among the companies listed on the NSE. This was further confirmed by R2 improving from 0.5 to 0.61 after dropping Share Price Performance Management from the model. The limitations of the study included the fact that topic is quite sensitive and most of the respondents viewed such information as confidential. The researcher convinced the respondents by first explaining that creative accounting is not necessarily illegal. Another limitation was the analysis of the secondary data employed the modified Jones Model, which despite its application by many researchers has been critiqued as having some limitations such as errors related to measures of discretionary accruals. The study recommended that, there is need for corporations to have special board members charged with monitoring and evaluation activities. Where such members exist, they need to be more vigilant in assessing the quality of the financial statements.