Creative Accounting Practices and Financial Reporting Quality in Deposit Money Banks

Abstract

The reliability of bank financial statements is central to confidence in the financial system because deposit money banks safeguard public deposits, allocate credit and perform systemically important functions. However, management's discretion in applying impairment policies and other accounting estimates may affect reported earnings and can create the appearance of lower-quality financial reporting. This study explored the consequences of creative accounting on the financial reporting quality of selected deposit money banks in Nigeria by examining loan-loss provision intensity and income smoothing. The study adopted a quantitative approach and an ex-post facto research design. Secondary data were collected from the audited annual reports of five selected deposit money banks covering 38 observations of bank-years of 2015-2024. The Financial Reporting Quality Index was used to quantify financial reporting quality, with bank size, leverage and profitability as control variables. Data were analysed using descriptive statistics, correlation analysis and panel regression. Following the Hausman specification test, the random-effects estimator was adopted. The results showed that loan-loss provision intensity had a negative but statistically insignificant effect on financial reporting quality (β = −0.2516; p = 0.8240). Income smoothing also had a negative but insignificant effect (β = −0.0051; p = 0.9322). Although the model was jointly significant, the two provision-based measures did not significantly explain variations in the disclosure-based reporting-quality score. The study finds that it is possible to report several financial disclosures and still employ managerial discretion. Regulators, audit committees and external auditors should thus remain vigilant of the assumptions on which impairment estimates are based.