Abstract: Creative accounting involves the manipulation of company financial records towards a predetermined target. Creative accounting plays a significant role in financial reporting, but it has been negatively correlated that means more managers involved in it may decrease the value of financial information. 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. The objective of this research was to establish the effect of creative accounting practices on shareholders’ wealth of companies listed at Rwanda stock Exchange. The objectives of the study were: to determine the effect of income smoothing on shareholders’ wealth of companies listed at the RSE, to examine the effect of accelerated depreciation on shareholders’ wealth of companies listed at the RSE and to determine the effect of tax avoidance on shareholders’ wealth of companies listed at the RSE. This research adopted a mixed research design which is a combination of descriptive design, causal design and cross-sectional design. The target populations comprised of top management of public limited companies that is the CEO, directors, top managers and accountants. A sample of 32 individuals was drawn from the public companies at RSSE using purposive sampling. Census approach was adopted in this study. A multiple linear regression technique was used to analyze the relationship between creative accounting practices and shareholders wealth. Quantitative approach through the use of questionnaires was adopted to help in the collection of primary data for analysis purposes. The secondary data was collected from RSE handbook relevant text books, finance journals, financial statements and the website of public limited companies that were sampled. Data was analyzed for descriptive and inferential statistics using SPSS version 21. Descriptive statistics such as tables, graphs, charts and percentages analysis were used for presentation of data. The data findings analyzed also showed that taking all other independent variables at zero, a unit increase in tax avoidance will lead to a 1.32 increase in Shareholders wealth; a unit increase in income smoothing will lead to a 0.81 decrease in Shareholders wealth, a unit increase in accelerated depreciation will lead to a 1.83 increase in Shareholders wealth. This infers that accelerated depreciation contribute more to Shareholders wealth of firms listed at the RSE followed by tax avoidance. At 5% level of significance and 95% level of confidence, tax avoidance had a 0.03 level of significance; income smoothing showed a 0.022 level of significant, accelerated depreciation showed a 0.000 level of significant hence the most significant factor is accelerated depreciation. 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.
Keywords: Income smoothing, Shareholders’ wealth, Rwanda Stock Exchange.
Title: EFFECT OF CREATIVE ACCOUNTING ON SHAREHOLDERS’ WEALTH: A CASE OF COMPANIES LISTED ON RWANDA STOCK EXCHANGE
Author: UGILIWABO CHRISTINE, Dr. PATRICK MULYUNGI
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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