CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
Earnings management is the deliberate neutering of monetary data to either mislead investors on the underlying economic standing of a firm or to realize some written agreement advantages that rely mostly on accounting numbers (Watts and Zimmerman, 2013: Healy and Wahlen, 2012). Accruals are the most important earnings management instruments that are used by managers to either increases or decrease reported income. This is because they are “components of earnings that are not reflected in current cash flows and a great deal of managerial discretion go into their construction” (Bergstresser and Phillippon 2013). Financial report is shown by an information management to assess the quality of a firm’s performance and demonstrate its responsibility to potential investors, employees, customers, society and government. Financial report serves to present information to help investors, creditors, and other potential users in a similar decision rationally. The statements are very important because of the demonstration of quality of management performance in a period of time. One importance of financial statements is its use to measure management performance.
Therefore, management will try to make a financial report in such a way that the performance of the company looks good in the financial statements. Due to the important role of financial statements in demonstrating the performance of a company, the management will try to mislead investors or the owner of the company to avoid the confidentiality of the actual condition of the financial statement. One way that is often applied to mislead the owner of the company or investors is conducting earnings management, because the manipulation of earnings management is the safest and legal, and does not violate generally accepted accounting principles (Haryudanto & Yuyetta, 2012). Following these scenarios, earnings management also called creative accounting, aggressive accounting, according to Ignacio (2015) is the manipulation of financial numbers, usually within the letter of the rules of law and standard accounting practices, but deviating from the spirit of those rules and certainly not providing the true and fair view that accounts are supposed to. This (earnings management) is becoming an area of interest to many researchers, after the case of Enron, World Com, and other similar accounting scandals in Nigeria particularly in deposit money banks. In 2013, the House of Representatives Committee on Finance accused commercial banks in the country of sundry sharp practices, including tax evasion, non-remittance of government revenue and outright falsification of their accounts. In a report released on the 25th of August 2013, the committee said it had uncovered a lot of discrepancies in the data submitted to it by the banks including the outright refusal to present documentary evidence of revenue remittances, blank violations of existing laws, self exemption from existing rules, false declaration and manipulation of financial information ( Ijeoma, 2014).
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