1. CREATIVE
ACCOUNTING
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2. INTRODUCTION


A term used to describe the practice of applying
inappropriate accounting policies or entering into
complex or “special purpose” transactions with
the objective of making a company’s financial
statements appear to disclose a more
favourable position, particularly in relation to the
calculation of certain ‘key’ ratios
Misleads users of financial statements
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3. INTRODUCTION
Following the law (regulations), the standards
(IASs, IFRSs) and the recommended
practice, and even with the results audited by
external companies, the scope for creative
accounting remains large
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4. DEFINITIONS

The accounting process consists of dealing
with many matters of judgment and of
resolving conflicts between competing
approaches to the presentation of the
financial events and transactions ….this
flexibility provides opportunities for
manipulation, deceit and misrepresentation
(Michael Jameson 1988)
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5. DEFINITIONS


A process whereby accountants use
knowledge of accounting rules to manipulate
figures reported in the accounts of a
business (Blake, Amat & Dowds 1998)
Transformation of financial accounting
figures from what they actually are to what
preparers desire by taking advantage of
existing rules and/or ignoring some or all of
them (Kamal Naser 1993)
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6. Why use Creative Accounting?
The shareholder and market reaction depends
more and more on managers' actions and
directors are increasingly judged on profit and
growth.
So company present a report to investors to and
at times like this, needs creative accounting.
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7. Creative Accounting used to:

Hide a particularly bad year for the company

Force an exceptionally good year

Continue the pressure to always be the best


Smooth out results to give an impression of
stability or sustained improvement
Boost assets to avoid take-over
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8. Creative Accounting
methods/
categories




Allow company to choose between different
accounting methods.
Certain entries in the account involve unavoidable
degree of estimation, judgment and prediction
Artificial transactions can be used to manipulate
balance sheet.
Genuine transactions can be timed to give
desired impression in the accounts.
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9. How accounting regulators curb
Creative Accounting ?


Reduce scope for choice of accounting methods.
Minimize use of judgment/ reduce scope for
estimate.

Invoke concept of substance over form.

Prescribe revaluation.
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10. Reasons for creative
accounting

Income smoothing

Report a steady trend of growth in profit rather than to
show volatile profits with a series of dramatic rises and
falls

Avoids raising expectations so high in good years that
company is unable to deliver what is required
subsequently

May conceal long-term changes in profit trend

Big bath – company making a bad loss seeks to
maximise the reported loss in that year so that future
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years will appear better

11. Reasons (cont’d)




Manipulate profit to tie in with forecast
Keep an income-boosting accounting policy
change to distract attention from unwelcome
news
To maintain or boost share price by reducing
apparent levels of borrowing and by creating
appearance of a good profit trend
To delay release of information for market (if
engage with insider dealing)
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12. Some common methods of accounting
manipulation (Rees 1995, p 60-61)







Excessive provision (revised)
Extraordinary items (not allowed anymore)
Off balance sheet finance
Capitalised cost
Non-trading profits
Brand accounting
Etc.
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13. Is creative accounting ethical?



There are legitimate techniques that can be
employed when computing certain items in
accounts
How creative can managers and accountants be
before their actions are considered unethical?
Difficult to draw an ethical line on creative
accounting because


GAAP often allow multiple accounting methods that a company
can choose from
Estimates are employed
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14. Is creative accounting ethical?

Proponents of creative accounting

GAAPs give various accounting methods to select
from and when applying certain methods,
companies choose the ones that make their
financial statements better. This is the nature of
business – to make company succeed as well as
possible. Creative accounting assists in this
endeavor.
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15. Is creative accounting ethical?

Opponents of creative accounting


Creative accounting is “accounting
manipulation”
To get desired results in short run but hurts the
ultimate goal of increasing stock value
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16. Conclusion


Creative accounting should be used if it is
within the ramifications of the law and
achieves the company’s ultimate goal of
increasing stock value. Must benefit
company in the short run and long run.
Not to mislead users of F/S
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