Effect of creative accounting practices on long term survival of firms listed at the Kenyan Nairobi securities exchange

Abstract

The current business environment and economic recession have recently pushed top management of many organizations into paying attention to making their financial statements look better using aggressive or creative accounting.Understanding reasons for survival and longevity of firms is central for managing financial accounts and reports. Some firms are more likely to survive longer than others are, thus some factors lead to relative longevity of some firms and cause others to fail.Complexities of creative accounting practices are fully exposed or felt only when the complete structure of a company has collapsed or failed in most of its operations.Accounting practices and scandal scan destroy any organization;therefore the need to restore integrity and public confidence to accounting operations.Key motives for creative accounting are to hide a particular bad year to force an exceptionally good year, smooth-out results to give impression of stability;to avoid liquidation.The study examined effect of creative accounting practices on long- term survival of firms listed at NSE.Hence, financial statements‟ data;was collected for the years between 2011 and 2015 for comparative purposes for a target population of65 firms. Failure or bankruptcy prediction model;Altman‟s ZETA-Score Model (1968) which allows simultaneous consideration of several variables in prediction of corporate failure was applied to predict long term survival.The study carried out statistical analysis on the financial statements of the firms and used the analyzed results to compute ratios for the analysis. Thus,87%of the firms were found to be having Z-scores less than1.81, indicating the presence of creative accounting.