Accounting forms the basis for determining the health of an organization. In this article, we examine how accounting is more than just a back end function. We look at Tata Motors to understand how companies are adopting financial engineering to restructure their balance sheets and thereby increasing their profitability. We examine how such `creative' accounting can help generate value for the companies. Finally, we examine the extent of such practices in the Indian context.

Creative Accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms `innovative' or `aggressive' are also sometimes used.

The twenty-first century has seen a lot of innovations in the field of accounting which can be credited to the creativity of accountants. It has been observed that economics is driving accounting and all companies are willing to experiment with new ideas and innovations in accounting which are different from the traditional rules but are still considered as `legal'. At times, it takes the garb of `financial restructuring', `corporate reorganization' or `business re-engineering', but the objective remains to enhance economic value through creative accounting. Even the new generation definition of `CA' has changed from `Chartered Accountant' to `Creative Accountant'.

In a recent study done by Noble in 2008, at least 30 companies in the BSE 500 are using aggressive revenue recognition techniques. The deterioration in their cash flow from operating activities despite a rise in operating profits suggests early booking of revenues. Around 60 companies in the BSE 500 seem to have booked `sales' that might have arisen from investment income or other income. At least 10 companies in the BSE 500 seem to have shifted expenses away from the current period by significantly reducing depreciation rates, according to the report. Further, at least 15 companies in the BSE 500 have disbursed the bulk of their loans and advances to companies in which the directors have an interest. The summing up of the revenues and profits shown in the quarterly results of firms and its comparison with those for FY2008-09 suggests that at least 25 firms in the BSE 500 reported full-year profits that were lower than the sum of the quarterly results. The 50 firms with the most creative accounting policies in India come from a range of market cap sizes and across a range of sectors.

Accounting World Magazine, Creative Accounting, Earnings Management, Financial Engineering, Financial Restructuring, Corporate Reorganization, Business Re-engineering, Capital Markets, Accounting Policies, Commercial Production, Business Reorganization.