creative accounting essay

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What Is Creative Accounting?

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Creative Accounting: Definition, Types, and Examples

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Investopedia / Candra Huff

Creative accounting consists of accounting practices that follow required laws and regulations but capitalize on loopholes in accounting standards to falsely portray a better financial image of a company. Creative accounting techniques vary and evolve as regulations change to close the loopholes that allow them.

Key Takeaways

Creative accounting capitalizes on loopholes in accounting standards to falsely portray a better financial picture of a company.
Creative accounting tricks vary in nature and consistently evolve as regulations change.
Getting caught can ruin a company's reputation—and sometimes result in criminal charges, convictions, and prison time.
Investors should always be skeptical and read financial statements from top to bottom for any signs of foul play.

How Creative Accounting Works

A primary benefit of public accounting statements is that they allow investors to compare the financial health of competing companies. But when firms indulge in creative accounting, they often distort the value of the information that their financials provide.

Creative accountants can always find bizarre and novel ways to tweak figures to a company’s advantage. Their goal is to make a firm look as successful and profitable as possible, and sometimes they will go about doing this by twisting the truth. If a gray area in accounting is found, it may be exploited—even if it results in misleading investors.

Getting caught can ruin a company's reputation overnight. Some management teams are willing to run that risk, condoning the use of creative accounting because failure to meet short-term expectations of Wall Street or year-end financial targets can have a hugely adverse impact on share prices.

It is also worth remembering that more attractive figures may lead to higher bonuses for directors, help convince a lender to give a firm a loan and inflate the company’s valuation in the event of a sale.

Types of Creative Accounting

Creative accounting tricks vary in nature and consistently evolve as regulations to police them change. Here are some examples of common techniques :

Overestimating revenues: One of the most common techniques used by public companies looking to artificially boost their income is to prematurely recognize revenue. Revenue recognition is an accounting method that enables companies to recognize sales before they deliver a product or perform a service. It is open to exploitation.
Lowering depreciation charges: Companies often spread out the cost of assets , rather than expensing them in one hit. Methods to reduce annual charges on these items can include extending the useful life estimate of the asset or increasing its assumed salvage value .
Delaying expenses : Deferring the recording of current period expenses, such as payments to suppliers and rent, to a subsequent period makes current period earnings look better.
Masking contingent liabilities : Failure to record potential liabilities that are likely to occur—and underestimating how much they are likely to cost—can boost net income or shareholders' equity .
Undervaluing pension liabilities: Pension obligations can easily be manipulated because the liabilities occur in the future and company-generated estimates need to be used to account for them.
Inventory manipulation: Inventory represents the value of goods that were manufactured but not yet sold. Overstating the value of inventory will lead to an understatement of the cost of goods sold , and therefore an artificially higher net income, assuming actual inventory and sales levels remain constant.

Real-World Examples of Creative Accounting

In the 1990s, energy, commodities and services company Enron Corp. engaged in all sorts of unethical accounting practices . It hid debt, understated losses and manipulated various financial figures to create an illusion of profitability, before filing for bankruptcy in 2001. Twenty-two executives pled guilty or were convicted, and a number went to prison for lengthy terms.

The WorldCom scandal is another high-profile example of creative accounting leading to fraud. To hide its falling profitability, the company inflated net income and cash flow by recording expenses as investments. By capitalizing expenses, it exaggerated profits by around $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss. Among others, the former CEO and CFO were sent to prison.

In the wake of the Enron and WorldCom scandals, among others, the Sarbanes-Oxley Act (SOX) was enacted in 2002 to deter fraud and require greater transparency of public companies.

Analysts , asset managers , and financial journalists failed to see many of the above scandals coming, proving that it is not always easy to spot questionable accounting practices. However, that does not mean that investors should sit back and do nothing. Being skeptical and reading financial statements a little more closely, rather than just focusing on what management highlights, can go a long way to detecting suspicious activity.

A good starting point is to carefully read company footnotes , assess the reliability of auditors , and pay careful attention to any unusual variations in figures.

What Are Examples of Creative Accounting?

Examples of creative accounting include overestimating revenues, lowering depreciation charges, and delaying expenses. Other common examples include underestimating potential liabilities, undervaluing pension obligations, and manipulating inventory.

Is Creative Accounting Legal?

Creative accounting is legal in that it exploits loopholes in laws and regulations. But it can ultimately lead to accounting fraud , which is illegal and was the case in the Enron and WorldCom scandals.

What Are U.S. Accounting Standards?

Generally accepted accounting principles (GAAP) are used in the United States for preparing financial statements. Outside of the U.S., companies follow the International Financial Reporting Standards (IFRS) .

Creative accounting takes advantage of loopholes to falsely portray a company’s financial health as better than is actually the case. While creative accounting is legal, it can lead to accounting fraud, which is illegal. Extreme examples include the Enron and WorldCom scandals.

Texas State Historical Association. “ Enron Corporation .”

U.S. Securities and Exchange Commission. " SEC Charges WorldCom With a $3.8 Billion Fraud ."

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On Creative Accounting: Two Creativity Myths

Teresa M. Amabile

“Creative accounting” is really bad. Except when it’s good. Say that in a roomful of managers, and you get nervous laughter. For me, it evokes a wonderful old New Yorker cartoon by Robert Weber , where a small, meek accountant stands before the desk of an overfed chief executive exhorting the accountant to rescue the company: “It’s up to you now, Miller. The only thing that can save us is an accounting breakthrough.” Thinking more soberly about “creative accounting,” we conjure up scenes of Enron executives being led into court, humiliated heads of accounting firms trying to explain how they failed to notice that someone was cooking the books, or recurring headlines about the AIG debacle . Wall Street’s “ financial innovations ” of recent years seem to have given creativity a bad name.

TA Teresa M. Amabile is a Baker Foundation Professor at Harvard Business School and a coauthor of The Progress Principle . Her current research investigates how life inside organizations can influence people and their performance, as well as how people approach and experience the transition to retirement.

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Creative Accounting

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First Online: 01 January 2016
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Salme Näsi 2

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Account manipulation ; Cosmetic accounting ; Earnings management ; Financial engineering ; Income smoothing ; Managing reported financial information ; Off-balance sheet financing ; Window dressing

A process of manipulating the accounting figures of an entity in order to mislead rather than help the intended users of the information.

Introduction

The term “creative accounting” seems to have appeared in the accounting literature in the 1950s (see, e.g., Park 1958 ; Bows 1959 ). At that time, however, the term seems to have referred to a positive creativity and the responsibility of accountants to find the best possible ways to earn a return on investments. Bows ( 1959 , p. 51) states: “Accounting can contribute to larger profits by creative analysis of costs and use of funds, by evaluating the profitability of the various segments of any business enterprise….” Accountants were seen as “continuous, creative, dynamic aid to management” (Park 1958 , p. 444; see also Carey 1956 ).

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Näsi, S. (2016). Creative Accounting. In: Farazmand, A. (eds) Global Encyclopedia of Public Administration, Public Policy, and Governance. Springer, Cham. https://doi.org/10.1007/978-3-319-31816-5_2297-1

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Sustainability and Creative Accounting Essay

Introduction, strategic importance of sustainability to decision-makers, methods of convincing to adopt the sasb standards, types of normal manipulation of revenue, importance of revenue manipulation discouragement.

Global decision-makers and academics are growing more interested in sustainability, and countless executives have become aware of the importance of the holistic corporate sustainability approach. Nevertheless, they encounter challenges when attempting to execute it in reality and link sustainability with strategic management. In general, sustainability serves as a marketing tool for most corporations, which allows them to gain a more significant competitive advantage and presence in the market. In order to become more renowned among the masses and be considered luring investments, the management of many firms even manipulates earnings. In this sense, sustainability and creative accounting are an integral part of most corporations that desire to be more successful.

When it comes to the strategic importance of sustainability to decision-makers, it lies within a more prominent presence in the market and recognizability. Organizations that become more sustainability-oriented, using resource-efficient technology, and providing eco-friendly goods and services, can benefit greatly from environmental governance, which outlines a company’s strategic stance with respect to sustainable development. According to a number of experts, including sustainability in company strategy is essential for achieving a long-term competitive edge in addition to the wellness of stakeholders, workers, and society at large (Calabrese et al., 2019). According to others, such initiatives must focus on the three organizational aspects of sustainability, which include financial, environmental, and social factors, as well as their effects and linkages (Calabrese et al., 2019). Essentially, by providing a conceptual model for the relevant decision-making mechanisms, these three components provide a method for integrating sustainability into strategy implementation.

In this sense, the sustainable strategy of most companies relies on a comprehensive framework. The fundamental principle of sustainability includes aspects related to the environment, the economy, and society and is ingrained in the long-term preservation of lifestyle quality (Calabrese et al., 2019). Due to their role in converting social and natural assets into commodities and services, major corporations are responsible for protecting the standard of living for future generations. In modern firms, the marketing function plays a significant role in the formulation of strategic decisions. Marketing is accountable for businesses’ and customers’ sustainable behavior attributable to its array of instruments for influencing, or controlling, consumption habits.

The methods of convincing the C-suite to adopt the SASB standards must first recognize the most vital individuals who contribute to the decision-making about sustainability. The Chief Executive Officer is the most frequently involved decision-maker, followed by the Chief Sustainability Officer, Chief Operational Officer, and regional executives are the most commonly involved decision-maker within the C-suite (Johnson et al., 2020). According to processed data, respondents indicated that a minimum of one C-suite executive was in charge of setting sustainability problems’ priorities (Johnson et al., 2020). As a result, it seems that the sustainability prioritizing process involves a wide variety of decision-makers.

Utilizing the SASB model is a desirable alternative as a result since it gives businesses a cost-effective means to prioritize sustainability concerns that are important to the value of the firm and an important stakeholder group. The method of convincing will involve a sustainable strategic planning process that will pinpoint the areas where a corporation and society are increasingly interdependent in order to emphasize the benefit. The business will adopt a tactical and operational strategy that will pursue mutual benefit, which entails investing in sustainability initiatives that may profit both the business and society at large. In this sense, the corporation will have advantages from concentrating on investments from stakeholders for socially-accepted initiatives. This will allow the business to grow and have increased earnings that will contribute to further research and innovations.

Regarding types of normal manipulation of revenue, these include many approaches, from investments to acquisitions. In the global ecosystem, revenue management is a complicated and cumulative problem. This phenomenon is a crucial and essential component of corporate finance. Profit management is the practice of managers manipulating income reports and transaction structures in order to deceive particular partners about the company’s financial success (Safta et al., 2020). It symbolizes the management’s choice of accounting principles that have an impact on revenues and the attainment of successful business outcomes (Safta et al., 2020). Since accounting information is the major source of data on the economic security, business output, and financial viability of any organization, inaccurate financial statements are detrimental to all parties.

The first type of accounting manipulation is the acquisition of another business. This strategy is similar to placing a speculative prediction, and one of its goals is to raise the purchased party’s reported earnings under the circumstances of a well-planned acquisition that is documented using one of the accounting techniques, such as through purchase (Strakova, 2021). The given approach has two related sub-techniques, including the process of incorporating the purchased business’s earnings into consolidated earnings and the deduction of expenditures for research and development paid for the business (Strakova, 2021). The first subsidiary method is deducting a portion of the purchase cost from current earnings during the year of purchase, protecting future revenue from the taxes, whose worth will rise relative to their initial value. In this sense, it affects earnings through additional income that comes from another firm.

Another type of accounting manipulation involves a company portfolio of investments. In a global setting, businesses have the option to purchase stocks from other businesses to reinvest extra cash or form a specialized strategic partnership (Strakova, 2021). An organization can control earnings by purchasing tradable and marketable assets. Operating profit includes gains or losses resulting from the sale of capital assets or fluctuations in their market price. The gain or loss resulting from a shift in the marketplace value of securities that are offered for sale is recorded in other income statements. If a situation emerges where assets offered for sale are traded, the gain or loss on such sales is reflected in the operating income of the firm (Strakova, 2021). Unacknowledged gains or losses are those that have not yet been realized and are reflected in profit but not operational earnings if the assets are not yet sold (Strakova, 2021). Therefore, such an approach allows to not disclose any realized losses in the earnings section and maintain the figure.

Lastly, numerous businesses use reported earnings as a technique to keep profits growing steadily or stop negative numbers from turning in financial reports that are not advantageous to the business. Nevertheless, the line between earnings manipulation and fraud is quite thin, and the widespread use of creative accounting may be seen as a significant warning indicator for supporting specific fraud allegations. Due to the links between the balance sheet and other statements that give an overview of the cash flow, losses, and gains, fraud might always be revealed.

Overstating earnings and assets in financial accounts is common. Compared to embezzlement, deliberate financial statement misrepresentation is significantly more commonly observed in earnings. The median crime was $4.1 million, while the mean deception on a consolidated basis was $25 million (Mehta & Bhavani, 2017). Furthermore, it might be challenging for investigators, as well as other stakeholders, to identify fraud using standard audit processes. Generally, there are three reasons behind the inability and ineptitude to determine financial fraud and manipulations. The first is a lack of understanding of the aspects of detecting fraud (Mehta & Bhavani, 2017). The second problem is that assessors lack the expertise required to spot falsified income reports (Mehta & Bhavani, 2017). The third is that management develops innovative strategies to deceive shareholders and auditors (Mehta & Bhavani, 2017). In this sense, fraud is a major problem for everyone nowadays. Financial fraud is one of the many forms of wrongdoing that results in significant losses for shareholders as well as the national economy. Consequently, it is indeed critical to prevent and identify fraud before it destroys the company, harms stockholders, and undermines the economy.

Hence, most businesses that wish to become more successful often incorporate sustainability and inventive accounting. Greater market presence and recognizability are key factors in the strategic value of sustainability to decision-makers. A sustainable strategic planning approach might be used to identify the areas where a company and society are becoming more interconnected and to highlight the benefits. Regarding the many methods of recurring revenue manipulation, these range from investments to acquisitions. Still, among the various wrongdoings, financial fraud is one that causes significant losses for both stockholders and the national economy.

Calabrese, A., Costa, R., Levialdi, N., & Menichini, T. (2019). Integrating sustainability into strategic decision-making: A fuzzy AHP method for the selection of relevant sustainability issues . Technological Forecasting and Social Change , 139 , 155-168.

Johnson, J. A., Sutton, S. G., & Theis, J. C. (2020). Prioritizing sustainability issues: insights from corporate managers about key decision-makers, reporting models, and stakeholder communications . Accounting and the Public Interest , 20 (1), 28-60.

Mehta, A., & Bhavani, G. (2017). Application of forensic tools to detect fraud: The case of Toshiba . Journal of Forensic and Investigative Accounting , 9 (1), 692-710.

Safta, I. L., Achim, M. V., & Borlea, S. N. (2020). Manipulation of financial statements through the use of creative accounting: Case of Romanian companies . Studia Universitatis Vasile Goldiș Arad, Seria Științe Economice , 30 (3), 90-107.

Strakova, L. (2021). Motives and techniques of earnings management used in a global environment . SHS Web of Conferences , 92 , 1-9.

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Creative accounting techniques regarding non-current assets generally refer to the treatment of development costs and of goodwill, to revaluation, amortization policy and impairments, to capitalization of expenses subsequent to commissioning and to interests. For example, creative accounting techniques regarding the development costs are linked to the decision to capitalize or not the expenses, and also to the capitalized expenses’ value and to their amortization policy.

The difference between development cost and research costs creates premises for creative accounting manifestation. Thus, an entity that uses a policy of capitalizing development costs can increase or decrease the result of a financial year by simply transferring them within the research category, situation in which the profit and loss account is affected, or within the development category, situation in which the balance sheet is affected. Moreover, the entity can invoke at any time uncertainties regarding the project finalization in order to transfer the development costs from the balance sheet to the profit and loss account (Feleag & Malciu, 2002: 399).

Creative accounting can also emerge when there are common expenses for several projects, and their delimitation on every project has a subjective character. Also, the dimension of goodwill is easy to manipulate. Thus, the undervaluation of purchased elements determines the increase of goodwill and provides an image of fake profitability in the future.

Creative accounting regarding tangible assets envisages the asset revaluation, the capitalization or not of certain expenses subsequent to commissioning, the amortization policy, and other special transactions. Amortization policy influences the result evolution by means of three variables: Depreciable cost; Amortization’s duration; Method (regime) of amortization (linear, accelerated, and digressive). In certain countries the depreciable cost is the difference between the input value (historical cost) and the residual value estimated at the end of the period of use. We can observe here a moment in which creative accounting emerges, which is linked to the residual value’s estimation and then, at the end of subsequent years, to the revision of this estimation. In Romania, according to the existent accounting regulations, residual value is null, therefore it is not taken into account when calculating the depreciable cost. Amortization’s duration is an accounting estimation available to the economic entity’s board, situation which involves subjectivism and, therefore, creative accounting. Within OPFM (Ordinance of the Public Finances Ministry) no. 3.055/2009 it is mentioned that: the amortization of tangible assets is calculated according to a plan of amortization, from the date of their commissioning until the full recovery of their input value, according to their terms of economic use and their conditions of use. The amortization calculated according to its terms of economic use is called financial amortization. Usually, in order for the accounting amortization to be equal with financial amortization, in practice economic entities establish the terms of economic use within the time span in which the normal functioning duration is comprised. We can also mention that the term of economic use is an accounting estimation, thus, economic entities can modify it subsequent to the commissioning of that certain asset, fact that generates modifications of accounting amortization with all its implications upon the financial year’s result.

The situation becomes more complicated if we also take into account the recoverable value of tangible assets at the end of the financial year when the impairment for non-current assets must be registered. Apparently, book value is objective, because at the moment the non-current assets are registered within the entity, it is validated on the market. One must not forget that in order to compare it with the recoverable value, from the book value one must subtract the registered amortization, the latter involving a series of variables. Creative accounting techniques regarding the non-current assets’ revaluation are usually used by the entities that suffer difficulties in order to increase its equity (revaluation reserves) and, thus, to artificially increase their debt capacity. Another place where creative accounting can emerge is the non-current assets production, by means of registering within the non-current assets’ value the fixed costs (salaries and amortizations) related to the subtask. In this sphere of creativity linked to non-current assets we can mention the lease-back operation which consists of selling a non-current asset to a leasing company, which is subsequently taken over in financial leasing. In this manner, the economic entity obtains the necessary economic resources in order to normally develop its activity and, at the same time, it can still use that certain asset, as if the entity still owned it. During the year the transaction is performed, the result increases, but it will decrease during the subsequent years by means of the leasing rates it will pay. The higher the transaction price is, the greater leasing rates and interests paid by the entity will be. Concerning the financial assets the problem that raises is whether to include them in this category or within the short-term financial investments, thus, modifying the economic indicators and also the determination of adjustments for depreciation. According to the principle of prudence, every loss of assets’ value must be acknowledged as an expense by determining adjustments for depreciation. Another example is the one related to selling equity investments in a moment when the market report is significantly greater than the purchase price; afterwards, the entity proceeds to repurchase them. The same technique is used when updating the securities’ input value and, simultaneously when increasing the result, even if the entity has to pay certain brokerage fees and the tax on the profit generated by the transaction.

Creative accounting techniques regarding current assets Creative accounting regarding current assets occurs in the following directions: stock evaluation, volume of stored production, choosing the accounting method for construction contracts, the artificial cession of placement securities, the calculation and registration of adjustments for stock and receivable depreciation, etc. The decision to constitute or not stocks of finished products enables an entity to improve its result. The decision to continue the production, even without immediate usefulness, allows hiding the subtask costs and obtaining a favorable result. Certainly, there is the risk that the market will not accept these products without a firm order, and therefore, they will transform in loss in the next period. The subtask’s cost accounting can be another manner of creative accounting manifestation. In management accounting there are two manners of including fixed costs within products’ costs: the full-costing method and the method of rational imputation. According to the full-costing method, the production cost consists of a share from the annual fixed costs in the following proportion: annual fixed costs x quantity in stock/annual produced quantity. According to the method of rational imputation, the production cost consists of a share fro the annual fixed costs in the following proportion: annual fixed costs x quantity in stock/annual normal quantity. In the first situation there is not such a subtask cost, all fixed costs being included within the production

cost even if the production capacities have not been used at their full capacity, while in the second situation the costs related to not using the production capacity is directly discounted upon the result without being included within the production cost. Creative accounting can also manifest in what concerns the methods used (the direct method or inventory method, respectively the indirect method or accounting method) in order to evaluate unfinished production at the end of the financial year. For the construction contracts which develop during a longer period of time one can apply two accounting methods: the method of progress percentage, when the revenues and expenses from the contract are acknowledged as the percentage of works in progress is registered within every financial year, which has as effect benefit distribution in every financial year; and the method at completed works, when the result is acknowledged only after the construction works are completed. When using the method at completed works, the result will be acknowledged only at the completion of construction works, until then the value of registered expenses being acknowledged as work in progress. In what concerns stocks, if their record is kept according to effective cost (purchase cost or production cost, as appropriate), the evaluation of stock outputs being made through FIFO, LIFO or CMP method, which, in case of inflation, ensure the achievement of different results. An entity’s result does not only rely on real economic performances, but also on the option for a certain method of stock evaluation. Another case of creative accounting emerges in the case of circular transactions, when two or more economic entities perform transactions amongst them in order to improve their results; for example, when two entities sell the same type of stocks at the same price to each another From the cash-flow point of view the impact is null, because everything one pays, one charges; from the VAT point of view the impact is also null because the purchase price is equal with the sale price. The sole difference is that the purchase cost of stocks would eventually increase (therefore, an increase of assets’ value is registered) and, simultaneously, the result would also increase (the equity volume increases). In this situation, there is a price that the two entities have to pay in order to embellish their results, which is the tax on profit that registered an increase. If the economic entities consider that there is a risk of not charging certain receivables, they can insure them. In this case there is no longer need to constitute an adjustment for receivables’ depreciation. There are companies which, urged by the desire to achieve a good embellishment of the result, insure the receivables only after the depreciation is determined. Thus, if the company determines the depreciation in the first year and within this year it is registered a high profit level, it will be interested in creating an adjustment for depreciation. When the result is unsatisfying, it will insure the receivable, registering expenses with the insurance premium and revenues from adjustments (Malciu, 1999: 18-28). Creative accounting regarding short-term financial investments manifests by including them within the non-current assets category, by means of cessions of placement securities, followed by their repurchase when the sale price is significantly higher than the initial purchase cost, by registering or not adjustments for depreciation.

Creative accounting techniques regarding liability elements Creative accounting regarding liability elements concerns share premiums which can be used in three directions: capitalization, including them within reserves and covering the expenses generated by new shares’ issuance and sale. The expenses generated by issuing and selling new shares are initially registered as assets, within set-up costs and from this point creative accounting may emerge: either set-up costs are amortized and, therefore, the result is directly influenced, or set-up costs are covered by share premiums.

Choosing the second situation is justified by the fact that it does not affect any shareholder, but it favors the state by not including an expense within the result and, therefore, one pays a greater tax on profit. However, applying this situation, the result remains higher which misleads the external users who give priority to result variation and less to share premium variation. Another liability element taken into account are the provisions which have the role to cover risks, expenses or losses that are uncertain concerning their dimension or the moment of their emerging. They occupy an intermediary position between equity and debts. Because they require estimations, provisions create conditions for results’ smoothing. Another creative accounting technique is related to debts towards employees. This technique especially emerges within small entities where the associates are not limited to capital contribution, but they also make a work factor contribution. The remuneration for the work force is the salary, but in order to avoid pay taxes considered too high, the associates register themselves as self-employed persons which, according to their field of interest, pay an annual fixed tax, irrespective of obtained revenues. Therefore, in this case, there is a profit transfer within the entity which pays the tax on profit, by means of bills issued by entity’s associates for their work, at the level of an individual who pays the flat tax. The associates win twice: firstly, they make savings from the tax on profit, and secondly, they do not have to pay the tax on dividends. This way, creative accounting is used for optimizing financial pressure, taking into account that the associates are not very interested in the information published within financial situations as the entity is a closed company (not quoted to stock market) of small dimensions. A creative accounting technique that has a direct impact upon the result of the current financial year emerges within certain entities which establish by means of formal or informal agreements that the buyer may return the goods that have not been sold. Basically, this practice does not pursue to influence results but, in certain situations, it can be considered a method of result smoothing if in the year the sale was performed, economic performances are inappropriate. In this manner, in the year the sale was performed profit will be acknowledged, and the next year a decrease of profit will be registered in return. One of the reasons for which annual financial situations are being approved after a certain period from the moment the financial year is closed is to identify events and transactions subsequent to that moment, but which actually belong to that certain closed financial year, in order to influence its results. If, at the end of the financial year goods sales are performed, followed by their return in the next financial year, which is previous to the approval of annual financial situations for the closed financial year, there are methods to remove the effects upon the result, as it follows: the revenues registered from sale will be annulled at the end of the financial year, and stocks will be considered as being produced by third parties and, therefore, stock variation related to sold products will also be annulled. The sole negative impact on the seller remains the VAT within the financial year in which the sale is performed, but it will be recovered in the next financial year.

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Creative Accounting Practice

Introduction.

Creative accounting is an accounting practice that has gained popularity among global firms. The practice will follow the internationally set rules and standards but slightly deviate from their spirit and norm for the firms’ benefits. Creative accounting will therefore seek to overstate or understate the firm’s value whenever the move seems to be beneficial. The practice also seeks to differ from the international set standards on the revenue recognition technique. The new practice opposes the historical cost valuation of assets and instead it advocates for the assets to be valued at their market price in order to capture the true value. This paper seeks to fully analyze the creative accounting practice.

How the practice was adopted

Creative accounting encourages the external users of the financial reports to increase their trust and faith in the firm’s management. The practice therefore uses similar accounting practices and guidelines, but may sometimes be manipulated to suit the targeted agenda. The firm’s management mostly acknowledges that some manipulations may deter the true and fair view, but it consistently insists that such undertakings are aimed at ensuring growth and development. According to the management, the creative accounting mission is to realize full growth potential within the industry. The reports may therefore be altered to enable the firm to easily access a loan or external funding which might necessitate it to expand its operations. In addition, the practice can be adopted to lower the firm’s recurring obligations such as loan repayments and tax liability. The corporate world, having greatly suffered from the previous economic recessions, prefers market valuation of assets and liabilities given that economic environment keeps on changing from time to time.

Due to poor performance in the current accounting practice, firms adopted the new creative accounting techniques. The current accounting practice is accused of having a very broad principles definitions which many firms have interpreted differently thus distorting consistency in the practice. Firms are unable to maintain proper accounting standards so they end up manipulating their books of accounts to reflect the true values of their assets and liabilities. The creative accounting practice, therefore, advocates for a true value reflected in the books of accounts. Many firms tend to overstate their assets values to induce the potential investors who may choose to join them. On the other hand, they understate their liabilities in order to reduce their leverage position. The creative accounting practice, therefore, emerged to inflate profit figures in order to overstate the firm’s value and therefore attract potential investors (Shah, 1998, p.9). The major difference between the current international accounting practice and creative accounting is that the latter emphasizes the true and fair reflection while the other one does not. Moreover, the new system employs some accounting tricks which usually include off-balance-sheet financing to overstate and exaggerate revenue recognition and the non-recurring items.

Creative accounting also keeps on changing from time to time as it seeks to advance with the new price development. Firms claim that the current principles’ diversities discourage the development and progress of many firms throughout the world. Although the major aim of accounting standards development was to ensure consistency, the different interpretation between firms makes it hard. The new practice tends to use the aggressive and innovative techniques in order to counter and manipulate the accounting systems (Mulford & Comiskey, 2002, p.39). The practice encourages the firm to use the market advantage in order to ensure competitiveness and survival. They therefore tend to overstate profits during the economic crisis period in order to convince the financial statement users of their good performance in the market. Although the move positively impacts the company’s present and future as the investors retain their invested amount, more loss can end up being experienced. Creative accounting therefore deviates from the firm’s co-objective which is usually the maximization of the shareholders’ wealth and interest. The adoption therefore cares much of the company’s welfare than that of the stakeholders.

The managers and other senior officials in a firm manipulate the financial reports to positively influence the contractual obligations that the firm may currently have with the external investors. As a matter of fact, the managers depend on creative accounting to hide the actual performance of the firm. Their main objective is therefore forcefully manipulated in order to avoid actual consequences that performance reductions entail. The earnings and revenues of the firm are therefore altered using some unique and aggressive accounting technique. The managers also exploit the loopholes in the current financial standards in order to capture the desired projections which eventually maintain the firm’s economic condition. The main factors that influence creative accounting include market expectations, personal realizations and the firm status. However, whenever the firm fails to achieve its market expectations, the aggressive earnings management becomes applicable (Duncan, 2002, p.1). Falsified figures will be used to reverse the downward performance in a company. Management may also use creative accounting to exaggerate their practical roles in the firm. In addition, the firm manipulates the reports so as to retain the top performance status even during worse economic periods.

How the practice works

The practice allows the accountants to manipulate the accounting reports in order to achieve desirable results. It has a different revenue recognition mechanism that aims at overstating the firm’s assets and alternatively understating liabilities. The off-balance sheet financial records are also altered in order to window dress the overall firm’s value. The practice similarly exaggerates the non-recurring items to inflate the current financial capabilities of a firm (Barreveld, 2002, p.135). Whenever the management feels that bonus ought to be paid to the investor, they inflate profits since as a rule such payments should only be effected at certain levels of profits. And in order to ensure less tax liability is charged to the firm, less profit will be reported. Because the financial institutions mainly check on the firm’s perceived risk, firms mainly minimize their bad debts, overstate incomes and assets and understate their liabilities in order to lower their risk standards. This manipulation therefore assists the firm to qualify for a loan at a considerably lower rate. The creative accounting has different reporting technique which intends to sway the potential investor’s decision on whether or not to purchase the company’s shares. As the majority of investors look forward to investing in a low price share and a firm with some growth potential, firms lower their profits to take the market advantage. In this case, the firm mainly understates income and assets while it overstates liabilities, stock levels, cost and expenses (Beneish, 2001, p.3). Additionally, the firm will delay income recognition in order to ensure that some revenues are not reflected in the books of account.

Adverse impacts of the practice to the users of the financial reports

Creative accounting is a risky practice that can adversely affect the intended purpose of the financial statements. The practice encourages some unfair and illegal practices which may end up ruining the report users. For instance, the overstatements of the profits will negatively lure the potential investors to incorrectly invest their amounts in uneconomical areas. Since the economic viability of many firms is usually measured from the financial reports, potential misrepresentation will significantly influence the report’s objective and focus (Abdel-Khalik, 1998p.148). The government also loses huge sums of money through fraudulent tax evasion of the firms. The firm presents considerably lower profits which the tax authority bases in determining the liability.

Failure to reflect true and fair values discourages accountability among the management team. As senior officials and fund managers, they should be ready to accept the outcomes of the company at all times. The manipulation has also adversely affected the financial institutions which lend out funds to unqualified companies. The distorted financial reflections also give a wrong image to a firm (Riahi-Belkaoui, 2004, p.54). The general public might therefore retain the high reputation of an economic declining entity; however, the real problem comes in when the firm shows a profitable image while it still continues to have some financial suffering in its internal operations. The share price valuations may also be a problem when the financial statements are wrongly defined and the capital market authority may therefore produce unfair share price value which may significantly mislead the potential investors.

My personal reflection on creative accounting

According to my personal view, creative accounting is an illegal practice that should not be encouraged among the firms. This is because the practice not only violates the set rules and principles in accounting, but it leads to huge loss of money in the governments. The practice also misleads the general public who solely depend on the reports to make some viable and economical decisions. The practice also employs unsuitable revenue recognition techniques which are aimed at benefiting the firm’s objectives. The firm may therefore understate its incomes and make some intentional delays when it wants to lower its tax liability. In such a scenario the firm usually uses some aggressive accounting tactics which seek to reduce its profit levels. To falsify the current debt position, the firm may seek to inappropriately estimate its liabilities and other financial obligation. By so doing the financial institution will wrongly calculate to risk level which they eventually use when determining the interest rates on the loan advanced. Loans advanced to a risky venture usually bear high-interest charges while those with low-risk levels are charged reduced interests.

Firms therefore tend to manipulate the financial statements to reflect a low-risk status. Some firms report some excessive provisions in their books of accounts, an undertaking that assists them lower the taxable amounts. Creative accounting equally allows for some minor breaches in the financial reporting which consequently aggregate to a material breach (Reynolds, 2005, p.1). The cunning and tactful accounting manipulations that the practice upholds can therefore greatly hamper the main objective in financial reporting. From my understanding, the financial statements ought to give a true and fair reflection of the financial position in a firm and any misrepresentation can greatly hamper the measures consequently undertaken in order to correct a downturn. In case of such a scenario, the management may not take some adequate measures which may assist the firm to grow and develop economically. The practice therefore not only misleads the external users, but it equally negatively influences the internal operations of a firm. I therefore agree that creative accounting has a negative impact on the management and also the external financial report users.

The practice can encourage the greedy and ambitious corporate leaders to further their selfish interests. Such leaders may therefore end up endangering the firm’s resources through undertaking risky and unproductive ventures which may adversely affect the future of the firm. Such fund managers may also illegally avoid tax liability payment which may have an adverse repercussion to the firm (Epstein, Nach & Bragg, 2009p.864). Legal action may be taken for the firm which fails to accurately furnish its tax liability in due time. As a result an extra expenditure may be incurred to pay fines and penalties charged due to contract breaches.

The corporate firms that use the creative accounting mainly discourage external auditing since they might discover some of the fraudulent manipulations in the books of accounts. The financial institutions and other external users of the financial reports therefore greatly question the reliability of such reports. It is advisable that, whenever an investor detects complexity in the financial reporting, he or she should beware since the firm might have implemented the creative accounting tactics. Creative accounting is mainly targeted to take advantage of the unsophisticated users of the financial statements who are many in the market (Baralexis, 2004, p.5).

Some of the positive arguments of the international accounting standards

The standards encourage consistency in the accounting practice. Since similar firms will be required to have similar financial statement preparations, the comparability becomes easy. The standards also emphasize true and fair reflections in the financial statements which improve their reliability (Epstein, Nach & Bragg, 2009, p.135). Potential investors can therefore solely depend on the financial reports in decision making. The system also encourages external auditing checks which may assist the firm to identify the irregularities in the financial recording. Since similar principles are supposed to be followed, the government can use such auditors whenever they sense that the firm is trying to manipulate its statements. As a result no much loss will be incurred through tax avoidance.

Firms follow the accrual accounting which enhances management accountability within the firm. The reports also encourage transparency of the financial reports to the internal and external users (Ruppel, 2009, p.87). Accrual accounting also assists the firm in efficiently and effectively allocating its resources. Such allocations translate positively to the firm’s growth. Conversely, the practice has been criticized for having inadequate assets and liabilities disclosures. Accrual accounting is also accused of increasing the tax liability of a firm since the entity cannot defer any liabilities amounts. In addition the reliability of the accruals accounting is questionable. This is because its microeconomic base is usually considered to be weak. When it comes to revenue recognition techniques, the GAAP has a unified way of accounting. Considering the wide use of financial statements in the decision-making process, it is important to have a universally recognized mechanism to ensure consistency.

How the accounting standards have positively changed to counter creative accounting

Many governments throughout the world have opted to adopt business sector accounting, to improve on financial reporting. Different sectors therefore prepare their financial statement differently depending on the field the sector engages in. the new financial reporting aims at improving accountability in the public sector (Benito, et al, 2007, p.8). The practice is also aimed at enhancing financial awareness among the general public. It ensures the reliability of the reports in the decision-making by emphasizing efficiency. Some governments also adopt the dynamic accrual accounting in order to reflect the flexible and changing nature in the accounting practice (Vinnari & Nasi, 2008, p.6). More flexible revenue recognition techniques have been adopted in order to cater to the diverse market changes. Efforts have therefore been directed towards replacing the existing generally accepted accounting principles (GAAP) with a new accounting approach. The move is aimed at creating consistency in the preparations of financial statements regardless of the industry the business operates in. In addition the new approach will significantly seek to reduce the many standards involved in the GAAP. The revenue recognition principles of many contracts will still remain as outlined in the GAAP. This is because the new practice does not aim at replacing the principles, but instead it targets improving them in order to ensure efficiency and effectiveness of the financial statements.

The retail transactions together with the long-term contracts will not be affected by the new practice. According to the board, revenue should be recognized after the goods have been successfully delivered to the customer (Bragg, 2004, p.74). This move aims at ensuring that all the performance obligations are accounted for in the books of accounts. To cater for the deficiency caused by the cash-based revenue recognition, the board intends to use the collect ability of payment criteria in determining the amount which increases the contract net wealth. If even after the delivery of goods and services to the customer, there stands a high possibility of losing the amount, the amount should not be considered as revenue. This move will ensure, that bad debts are not accounted as revenues in the financial statements. The newly improved revenue recognition principles, therefore, tend to improve the overall reliability in the financial statements (Bragg, 2007, p.118).

In order to take care of the broad definitions in the GAAP principles the concerned bodies are making relevant adjustments which may be beneficial to the overall accounting practice (Clarke, Dean & Oliver, 2003, p.25). The principles have nevertheless resulted in inconsistencies since firms have differently interpreted the standards. Partial changes of the principles are underway as the board seeks to ensure efficiency and consistency in the financial statements preparations. Consequently, the board also aims at simplifying the standards in order to increase their usability. The new approach intends to reduce the many standards that are currently used by the firms thus making them more user-friendly. The regulating body therefore seeks to increase the reliability in the accounting practice. It also seeks to check the few firms which may seek to exploit the aggressive techniques in engaging in illegal undertakings. The body has also significantly advanced in materiality determination. According to the new rules and regulations the small contract breaches that are advocated by creative accounting can be aggregated to produce a material breach which a firm may be sued for. Such clear definitions are aimed at ensuring that firms are accountable for the loss they cause to the external report users. The body also emphasizes the importance of a firm using an external auditor. Strict rules and regulations have been put in place in order to guide the behavior of such auditors. The code of ethics is also deeply aligned to the personal discipline which is always regulated by regular checks on their practices (Bragg, 2006, p.11). According to the body the credibility of the report presented by such auditors is high compared to the report prepared by internal auditors.

Due to easy detections of fraud by the external auditors, some firms have opted to use a sophisticated earnings management in order to cover up this (Dr. Hsieh & Tsai, 2005, p.10). In order to avoid such occurrences auditors have been cautioned to distinguish between error and fraud by identifying some of the intended purposes which may be deeply hidden in the reports. This move has been taken as the management mostly defends their fraudulent motives by terming them as errors. The external auditors are also well equipped to determine the unsuitable revenue recognition methods that the firm might be using in its accounting systems. With the newly adopted accounting practice which is aimed at reinforcing the GAAP, more reliable and efficient accounting practices will be put in place. The improvement is aimed at ensuring that firms reflect their fair value in the financial reports. The credibility of the report will enhance the internal and external users to evaluate the financial position.

Creative accounting though established to check on the inadequacies in the GAAP have a lot of deficiencies as they encourage inconsistencies in the accounting practice. The practice tends to follow the set standards and principles but deviates from their spirits and norms. Firms can therefore decide to manipulate some of the financial reporting techniques to achieve some self-set objectives. The practice therefore misleads the general public who solely depend on the reports to make some viable and economical decisions. The practice also employs unsuitable revenue recognition techniques which are aimed at benefiting the firm’s objectives. The firm may therefore understate its incomes and make some intentional delays when it wants to lower its tax liability. In such a scenario the firm usually uses some aggressive accounting tactics which seek to reduce its profit levels.

In order to falsify the current debt position, the firm may seek to inappropriately estimate its liabilities and other financial obligation. The practice encourages some unfair and illegal practices which may end up ruining the decisions of the report users. For instance, the overstatements of the profits will negatively lure the potential investors to incorrectly invest their amounts in uneconomical areas. Since the economic viability of many firms is usually measured from the financial reports, potential misrepresentation will significantly influence the report’s objective and focus. The government also loses huge sums of money through fraudulent tax evasion and avoidance in the firms. The loopholes and irregularities that are necessitated by creative accounting practice, therefore, make it receive many criticisms. The practice can also be exploited by selfish and greedy personnel to achieve their goals. The practice should be discouraged since it can adversely affect the normal and fair accounting practices that are represented in the GAAP.

Reference List

Abdel-Khalik, R.A., 1998. The Blackwell encyclopedic dictionary of accounting. London, Wiley-Blackwell (Online). Web.

Baralexis, S., 2004. Creative Accounting in small advancing countries, Greece. University of Macedonia , Vol.19 (3).

Barreveld, D.J., 2002. The Enron collapse: creative accounting, wrong economics or criminal acts? A look into the root causes of the largest bankruptcy in U.S. history. New York, PublisheriUniverse. (Online). Web.

Beneish, D. M., 2001. Earnings Management: A perspective, Bloomington. Indiana University, Vol.27. No.12.

Benito, B. et al., 2007. Critical perspectives on accounting . (Attached material)

Bragg, S.M., 2004. GAAP implementation guide . New Jersey, John Wiley and Sons. (Online). Web.

Bragg, S.M., 2006. The ultimate accountants’ reference: including GAAP, IRS & SEC regulations, leases, and more . New Jersey, John Wiley and Sons. (Online). Web.

Bragg, S.M., 2007. Wiley GAAP Policies and Procedures . New Jersey, John Wiley and Sons. (Online). Web.

Clarke, F.L., Dean, G.W. & Oliver, K. G., 2003. Corporate collapse: accounting, regulatory and ethical failure . London, Cambridge University Press. (Online). Web.

Dr. Hsieh, L. & Tsai. Y., Information asymmetry, creative accounting and moral choice: An apocalypse of procomp informatics ltd. London, American academy of business journal, Cambridge.

Duncan, C., 2002. WorldCon puts the markets on a knife-edge . (Online). Web.

Epstein, B.J., Nach, R. & Bragg, S.M., 2009. Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles . New Jersey, John Wiley and Sons. (Online). Web.

Epstein, B.J., Nach, R. & Bragg, S.M., 2009. Wiley GAAP Codification Enhanced. New Jersey, John Wiley and Sons. (Online). Web.

Mulford, C.W. & Comiskey, E.E., 2002. The financial numbers game: detecting creative accounting practices . New York, John Wiley and Sons. (Online). Web.

Reynolds, B., 2005. G8 deal criticized for “creative” accounting. Accountancy magazine. (Attached sources).

Riahi-Belkaoui, A., 2004. Accounting theory . London, Cengage Learning EMEA. (Online). Web.

Ruppel, W., 2009. Wiley GAAP for Governments 2009: Interpretation and Application of Generally Accepted Accounting Principles for State and Local Governments. New Jersey, John Wiley and Sons. (Online). Web.

Shah, A.K., 1998. Exploring the influences and constraints on creative accounting in the United Kingdom. European accounting review , Vol.7 (1). London, University of Essex.

Vinnari, E.M. & Nasi, S., 2008. Creative accrual accounting in the public sector: “Milking” water utilities to balance municipal budgets and accounts. Financial Accountability & management , Vol.24 (2).

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Creative Accounting

Published Date: 03 Oct 2016 Last Modified: 14 Nov 2016

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Introduction

There exist no single definition for the term creative accounting. A few creators contend that, creative accounting is 'a gathering of methods, choices and opportunity room left by accounting regulation, without moving far from laws or accounting necessities, permitting to the directors to change the fiscal result or the monetary explanations' (Gillet, cited by Shabou and Boulika Taktak, 2002). An alternate meaning of the term creative accounting is as takes after, 'a get together of methodology keeping in mind the end goal to change the benefit, by expanding or diminishing, or to distort the budgetary explanations, or both of them' (Stolowy 200). A last meaning of the term is, " the change of budgetary accounting figures from what they really are to what plans seek by exploiting the current tenets and/or disregarding some or every one of them' (Kamel Nasser 1993). The general thought behind this idea is that monetary data is manipulated to speak to a money related position and execution, that does not reflect its actual position and execution. Supervisors won't have the capacity to manipulate their accounting figures if accounting tenets won't permit them to do so. In the US, the money related data is ready utilizing the Proper accounting rules (GAAP), which is made by the Financial Accounting Standard Board (FASB). Be that as it may, these guidelines are not sufficient as regardless they permit adaptability in accounting. There exist no standard recipe for changing over numbers into money streams.

Creative Accounting and corporate governance- both are dealt with in the writing broadly and the contrast utilized respects the view of each. While the first idea is dealt with and acknowledged as having a general importance, the last is thought to be dubious regarding implications and acknowledgement. In this respect its applied delimitation is thought to be vital in the presentation of this study since the implications ascribed reflect additionally our perspectives. The idea "creative accounting" acclimatizes different definitions in the writing and it is inspected under two vital perspectives: a positive one and a negative one. From a positive perspective, it may appear that creative accounting hints creation of accounting standards and methods to perceive changes in financial, social, and political furthermore business situations and perceives bona fide changes in accounting practice. From a negative perspective, creative accounting means undesirable practices which acclimatizes dishonest components for pulling in suppliers of the capital by displaying a deluding and misleading state of a certain firm`s undertakings. A large portion of the theoretical delimitation in regards to creative accounting is identified with those two perspectives and the general pattern distinguished in the writing backings the negative perspective. The act of creative accounting has the ability to misshape the underlying money related execution of a firm, making more troublesome for a speculator or monetary investigator to evaluate the execution of the firm and to look at between changed organizations. Therefore creative accounting as a beguiling practice clashes with the essential point of accounting regulation changing the activity of standard setting in a repetitive peculiarity on one hand and then again giving an unreasonable playing point to organizations that can effectively polish this beguiling activity. The sentiments with respect to creative accounting practice, as an instrument of deluding are different and the definitions various. The extent of our study was not to recreate this definitions (regardless of the possibility that this demarche could be helpful for a finer comprehend of the recent point) however more to build an inner history of the significant writing that approached this theme. In with respect to we consider more applicable to approach the making of a system of center terms for the writing being referred to and to distinguish the essential and optional center terms used to portray this subject into the worldwide significant examination group. In this admiration we utilized Papineau`s (1976) idea of sliding request of center terms to demarche those terms that are integral to all analysts with the extent of an intensive understanding of the improvement of a specific writing. Since the extent of the article is not to create the epistemology of this develop and in addition the relationship with the corporate governance build, we discussed just four separate feelings in regards to the creative accounting importance under the aegis of Papineau`s (1976) pecking order of center terms as taking after:

As with respect to Metcalf (1977:188) approaching we recognized as essential center term in clarifying creative accounting the ``accounting techniques`` that allow companies to report budgetary comes about that may not correctly depict of business exercises. As auxiliary center terms we can further create focused around its presumptions the subjective and target way in which the accounting methods are utilized;
From Naser (1993:2) we can distinguish as essential center terms for clarifying creative accounting the ``accounting figures``. In this admiration the preparers inspirations are critical since their longing is to exploit the current leads with a specific end goal to succeed to fulfill their specific objectives;
Citron (1995) perspective give other essential center term as ``accounting rules`` and further as auxiliary center terms the certain yearning of preparers to `` stretch`` the standards and ``mislead`` the peruser of monetary articulations;
Amat and Gowthorpe (2004) assessment in regards to creative accounting give an intriguing sight since it gives two sorts of essential center terms as ``ambiguities`` and `` discontinuities`` of the law. The auxiliary center terms embody the ramifications of the first together with the craving of deceive as opposed to help the planned utilized.

As we would like to think creative accounting could be characterized as a mean being utilized by the organizations within request to adjust, create and get to be more aggressive in the turbulent situations in which they work, adjustment that requires exceedingly versatile experts equipped to produce creative plans regardless of the possibility that these utilize translating hazy areas further bolstering their good fortune being less judicious just about constantly; look for provisos in particular tenets being not as reliable as ought to be or create gadgets which controllers have not thought.

Hypothetical system for managing our exploration address as far as interfacing the two ideas

We consider the definition explained by Shleifer and Vishny (1997) as illustrative since we can recognize the foundations of creative accounting conduct as the accompanying affirms the potential presence of wrong lead of administration: "Corporate governance incorporates all the procurements and instruments that ensure the benefits of the firm are overseen proficiently and in light of a legitimate concern for the suppliers of fund, moderating the improper seizure of assets by administrators or another gathering to the firm". Chiefs at times deceive shareholders with respect to the underlying financial execution of a certain organization or may impact contractual results that rely on reported accounting figures (Healy, 1985; Perry and Williams, 1994; Defond and Jiambalvo, 1994). By utilizing judgments within fiscal reporting and through organizing transactions they may modify money related reports and as a result, this way may prompt a set of monetary articulations that don't give a genuine and reasonable perspective of the financial exercises of an organization. Managerial carefulness in the application of accounting strategies used to report firm execution is not thought to be manipulative until this specific circumspection is utilized with the expectation to control reported results. This is connected likewise to the way that supervisors may concentrate on fleeting individual motivators, for example, expanding compensations, rewards, and other transient remunerations, as opposed to concentrate on the long- term financial accomplishment of the firm. Each one of those questions show up where a detachment of the proprietorship from the control of an organization exists and in this admiration the clash that emerges is portrayed by the Agency hypothesis. In the setting of Agency Theory the firm is thought to be a legitimate fiction that serves as a center for complex process that is portrayed by conflictual peculiarities of the targets of people (Jensen and Meckling, 1976). The clashes are identified with imparting the monetary assets and the absence of certainty, these clashes between the shareholders and directors being considered in the writing to be the foundation of creative accounting. Most considered led in the writing are focused so far on the relationship between shareholders-administration collaboration that includes the seriously wrangled about clash of diversions as the schemas created by Demski (1994), and further Christensen and Feltham (2005) clarified.

The points corporate governance and creative accounting practices are examined in the writing in the connection of inside interest for manipulative conduct which radiates from the contracting estimation of profit administration in the principalâ€“agent connections in the middle of shareholders and chiefs (Dye, 1988). This specific clashes of investment innate in org connections, in some cases are restricted having the way that shareholders disregarded and acknowledge purposeful controls of records getting to be thusly ``unwitting assistants to manipulation`` (Gowthorpe and Amat, 2005) as they are tolerating the way that piece of control of records focal point them. The criticalness of corporate governance ponders in the range of creative accounting displayed under all its types of indication is identified with the general pattern exhibited in the writing that poor governance affect or maintain a manipulative conduct. Likewise talks are respected the way that poor governance brings about expanded recompense bundles that incite Ceos to act in a manipulative way. Then again, late studies led in the writing approached the issue of poor corporate governance fundamentally with the extent of finding the gimmicks that help this state and archived that the causality of this demarche is spoken to by the income administration and further stretched out to records control. In this admiration, further experimental studies are required to recognize unquestionably the relationship between records control and corporate governance and survey the criticalness of one another and the way that they strengthen one another.

The subject of data asymmetry is additionally talked about since no approaching with respect to corporate governance in the range of creative accounting discards it and since the hypothesis in regards to data asymmetry can possibly clarify the various impetuses found on the monetary business sector to control accounting information and further to evaluate the result of such conduct. The work of Vickrey (1945); Akerlof (1970, 1976); Mirrlees (1971); Spence (1973); Rothschild and Stiglitz (1976) is analyzed since they created the spearheading studies in regards to asymmetry of data. By understanding their work we can have a completely understanding of the businesses conduct with results upon our zone of exploration since data asymmetry is viewed as an additionally as a genesis point for manipulative conduct. The general perspective regarding the matter of clarify data asymmetry is that one side of the business has better data that the other. In the connection of corporate governance the CFO and the leading group of the organization knows more than the shareholders and different clients of accounting data about the productivity of the organization. Five hypotheses have given the hypothetical underpinning to research artful conduct in the zone of corporate governance. Organization hypothesis; authenticity hypothesis; institutional hypothesis; indicating hypothesis and stakeholder hypothesis portray distinctive purpose of perspectives in relationship with managerial speculator performance.

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Creative Accounting: Definition, Types, and Examples
Creative accounting consists of accounting practices that follow required laws and regulations, but deviate from what those standards intend to accomplish. Creative accounting capitalizes on ...
Creative Accounting
Creative Accounting Explained. Creative accounting is an accounting Accounting Accounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements. read more practice that helps the company deviate from the profits and revenues for the year by following rules and regulations.
On Creative Accounting: Two Creativity Myths
On Creative Accounting: Two Creativity Myths. by. Teresa M. Amabile. November 29, 2010. "Creative accounting" is really bad. Except when it's good. Say that in a roomful of managers, and you ...
Motivation Behind Creative Accounting Accounting Essay
Motivation Behind Creative Accounting Accounting Essay. Creative accounting is a practice that potentially being undertaken as a result from some individual care more on their own interest and indirectly causes issues arise in ethical dimension of creative accounting. From information perspective, agency theory gives a clear picture on creative ...
Full article: Exploring the evolution of creative accounting and
1. Introduction. Creative accounting involves manipulating financial accounts in a way that violates generally accepted accounting principles (GAAP) (Abed et al., Citation 2022).This can lead to a misleading representation of a company's financial performance, causing uninformed decisions based on the presented information.
Where Accountants' Creativity Can Lead
The practice of creative accounting goes as far back as Hollywood accounting in the second half of the 20th century. Since then, using lawful applications of the finance laws and regulations employed to deceive the audience about the available wealth of the "preparer" has been named creative accounting. The practice is usually used to improve ...
Creative Accounting Determinants and Financial Reporting Quality ...
Creative accounting is considered to be a 21st-century phenomenon that has received increased attention after the worldwide economic crisis and budget deficits, particularly the prevention and detection of accounting manipulation. Creative accounting is a practice that influences financial indicators by using accounting knowledge and rules that do not explicitly violate accounting policies ...
(PDF) The Ethics of Creative Accounting
THE ETHICS OF CREATIVE ACCOUNTING. INTRODUCTION. The term 'creative accounting' can be defined in a number of ways. Initially we will offer this. definition: 'a process whereby accountants use ...
(PDF) A Systematic Critical Review of Creative Accounting and Financial
The most critical keywords in the area covered by this study are "Creative accounting." and "Financial. reporting". Moreover, we investigated the studies which have been focused on ...
Creative Accounting
Creative accounting as a concept is mostly used in European accounting literature, while the preferred term in the United States - and consequently in most of the literature on the subject - is "earnings management" (Amat and Gowthorpe 2004).Creative accounting is defined as "the use of accounting to mislead rather than help the intended user, deliberately taking advantage of areas ...
The Implication of creative accounting on the firms
This paper will explore the ethic and the way of using creative accounting providing with practical example. Aims and Objectives: To understand the meaning and explore definitions of creative accounting. To explore several reasons or motives of the using CA by company's managers. To list and explain the techniques of creative accounting.
Sustainability and Creative Accounting Essay
Motives and techniques of earnings management used in a global environment. SHS Web of Conferences, 92, 1-9. This essay, "Sustainability and Creative Accounting" is published exclusively on IvyPanda's free essay examples database. You can use it for research and reference purposes to write your own paper.
Creative accounting
Creative accounting techniques regarding non-current assets generally refer to the treatment of development costs and of goodwill, to revaluation, amortization policy and impairments, to capitalization of expenses subsequent to commissioning and to interests. For example, creative accounting techniques regarding the development costs are linked to the decision to capitalize or not the expenses ...
Why The Creative Accounting Is Important Factors Essay
Firstly the definition of creative accounting and how corporate governance and fraud are connected to creative accounting should be discussed. Creative accounting defines that a company uses the accounting knowledge to distort the financial figures but by following. Get Access. Free Essay: Financial reports are one of the most important factors ...
Creative accounting
Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, ... Creative accounting: Nature, incidence and ethical issues, Economics Working Papers 749, Department of Economics and Business, Universitat Pompeu Fabra. de la Torre, Ignacio (2009).
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PDF THE ETHICS OF CREATIVE ACCOUNTING
Abstract The term 'creative accounting' can be defined in a number of ways. Initially we will offer this definition: 'a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business'. To investigate the ethical issues raised by creative accounting we will: • Explore some ...
Creative Accounting essay (400 Words)
Order custom essay Creative Accounting essay with free plagiarism report. Incase of a recently taken over company, it is a common practice for the existing Board of Directors to get fired, so they try to manipulate their incomes and produce a significant loss, so that they may be able to blame the previous managers for it.
Essay Creative Accounting Techniques Keeping A Balance ...
ESSAY CREATIVE ACCOUNTING TECHNIQUES: KEEPING A BALANCE BETWEEN PROFIT AND ETHICS. Management profit and technique accountancy creative is two very thing _ important for company. So from that , second matter This must understood and applied with fine by every company. In matter this , author will give A little description about management ...
The Ethics of Creative Accounting
3. Creative accounting may help maintain or boost the share price both by reducing the apparent levels of borrowing, so making the company appear subject to less risk, and by creating the appearance of a good profit trend.Accounting Ethics: Ethics in the business background is essential to success, however some stipulate to the more deceitful ...
Pacific National University
The Pacific National University (PNU) is a public university in Khabarovsk, Russia, established in 1958.PNU has over 21,000 students in 54 various academic majors.. Sergei N.Ivanchenko (Иванченко Сергей Николаевич), the rector of the Pacific National University has signed a letter of support for the Russian invasion of Ukraine.
Creative Accounting (300 Words)
Creative Accounting. The term of creative accounting refers to select accounting methods for the preparation of financial statement that provide the result desired by the accounting preparers. Especially when the firms are under a financial difficulty, the need of creativity would be very apparent because it might be difficult for parties such ...
Khabarovsk
Khabarovsk (Russian: Хабаровск [xɐˈbarəfsk] ⓘ) is the largest city and the administrative centre of Khabarovsk Krai, Russia, located 30 kilometers (19 mi) from the China-Russia border, at the confluence of the Amur and Ussuri Rivers, about 800 kilometers (500 mi) north of Vladivostok.As of the 2021 Russian census, it had a population of 617,441.
Creative Accounting
Creative Accounting. Introduction. There exist no single definition for the term creative accounting. A few creators contend that, creative accounting is 'a gathering of methods, choices and opportunity room left by accounting regulation, without moving far from laws or accounting necessities, permitting to the directors to change the fiscal result or the monetary explanations' (Gillet, cited ...
Fact Sheet on FTC's Proposed Final Noncompete Rule
The .gov means it's official. Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you're on a federal government site.
Creative accounting
Creative accounting is a growing issue of concern in the UK, threatening the credibility of both accounting and auditing auctions. The truth and fair view principal, which suggest that enterprises should give a truth and fair image of their operations, is now tolerated in favor of unethical practices. ... 2011, p.5). The aim of this essay is to ...

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