Accounting World Magazine | Creative Accounting : Magical Way of Rethinking

The Accounting World Magazine:

Creative Accounting : Magical Way of Rethinking

Pub. Date	:	February, 2009
Product Name	:	The Accounting World
Product Type	:	FINANCIAL REPORTING
Product Code	:	AWFR20902
Author Name	:	Sumeet Gupta and Amiya K Mohapatra
Availability	:	YES
Subject/Domain	:	Finance
Download Format	:	PDF Format
No. of Pages	:	7

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	Abstract
	Creative Accounting is an accounting practice that follows accounting standards but slightly deviates from the spirit of those standards. The intention is to influence the interested parties towards the interpretations. Creative Accounting, also called aggressive accounting, is the operation of financial numbers, usually within the orbit of the law and accounting standards but not providing a "true and fair" view. A distinctive aim of Creative Accounting is to inflate profits, smoothing of financial results, assets and liabilities manipulation, etc. This article studies the various Creative Accounting practices being followed by organizations to manipulate figures. It also explains how the organizations use these tactics to make the figures more impressive and attractive.

Description

Creative Accounting is a debatable issue in the present scenario. The present Indian economic scenario is characterized by an economic slowdown. In this situation there has been a pressure on the profit of the companies. (Statement by Saurabh Mukherjee—Head, Indian Equities (Noble)). Not only the sales and revenue growth but capacity utilization is also under pressure. Earning per share is also going down. In such a situation, to maintain the market share and market price, the companies are required to present impressive numbers to the market.

Creative Accounting tends to modify the books of accounts in such a way that leads to income smoothing and impression management. Creative Accounting is defined as the application of variability in the accounting principles, practices and procedures to modify the books of accounts so that the organization's financial performance would acquire a creative view and organizational objective is served. Creative Accounting is basically an impression management to convey more suitable and effective view of company's financial position, assets and liabilities to the interested parties. The motivation to indulge in Creative Accounting may include higher share prices, improved credit rating, lower borrowing costs, etc. It is basically described as deliberate misrepresentation of enterprise financial results.

Creative Accounting is a fairy tale through which the company can lead to window-dressing. The results of such tactics are very peculiar. Some of the Creative Accounting examples include improper revenue and expense acknowledgment, flawed accounting, and unfair use of off-balance sheet arrangements. It can be overwhelming to shareholders, lenders, employees, board of directors and other stakeholders. It may lead to failure of organizations or frauds, etc. The failure of companies like Enron and WorldCom are peculiar examples of repercussion of Creative Accounting. The global contest triggered by these events raised questions regarding the factors leading to the widespread Creative Accounting practices. It is the rising issue at global front also. This system poses a number of questions in the mind of the investing public. In the ambit of Corporate Social Responsibility, the companies are required to comply with the social regulations and give a true and fair view of their financial positions.

Keywords

Accounting World Magazine, Creative Accounting, Aggressive Accounting, Indian Equities, Current Assets, Creative Accounting System, Creative Accounting Practices, Corporate Social Responsibility, Indian Economic Scenario, Accounting Standards, Cash Manipulation, Internal Control System.