CREATIVE ACCOUNTING
Despite the proliferation of accounting rules and the independent checks that are imposed,
concerns over the quality of published financial statements surface from time to time. There are
occasions when directors apply particular accounting policies, or structure particular
transactions, in such a way as to portray a picture of financial health that is in line with what they
want users to see, rather than what is a true and fair view of financial position and performance.
Misrepresenting the performance and position of a business in this way is referred to as creative
accounting and it poses a major problem for accounting rule makers and for society generally.
REASONS FOR WHY DIRECTORS MAKE CREATIVE ACCOUNTING
To get around restrictions (for example, to report sufficient profit to pay a dividend);
To avoid government action (for example, the taxation of excessive profits);
To hide poor management decisions;
To achieve sales revenue or profit targets, thereby ensuring that performance bonuses are
paid to the directors;
To attract new share capital or long-term borrowing by showing an apparently healthy
financial position;
To satisfy the demands of major investors concerning levels of return.
CREATIVE ACCOUNTING METHODS
Key elements of financial statements such as revenue, expenses, assets, and liabilities are used to
manipulate the report. For example, revenue can be used to manipulate when directors engage in
channel stuffing, pre-dispatching, hollow swaps, round tripping. However, creative accounting is
misleading and it is unnecessary. It has negative impact on economic growth.
Despite the proliferation of accounting rules and the independent checks that are imposed,
concerns over the quality of published financial statements surface from time to time. There are
occasions when directors apply particular accounting policies, or structure particular
transactions, in such a way as to portray a picture of financial health that is in line with what they
want users to see, rather than what is a true and fair view of financial position and performance.
Misrepresenting the performance and position of a business in this way is referred to as creative
accounting and it poses a major problem for accounting rule makers and for society generally.
REASONS FOR WHY DIRECTORS MAKE CREATIVE ACCOUNTING
To get around restrictions (for example, to report sufficient profit to pay a dividend);
To avoid government action (for example, the taxation of excessive profits);
To hide poor management decisions;
To achieve sales revenue or profit targets, thereby ensuring that performance bonuses are
paid to the directors;
To attract new share capital or long-term borrowing by showing an apparently healthy
financial position;
To satisfy the demands of major investors concerning levels of return.
CREATIVE ACCOUNTING METHODS
Key elements of financial statements such as revenue, expenses, assets, and liabilities are used to
manipulate the report. For example, revenue can be used to manipulate when directors engage in
channel stuffing, pre-dispatching, hollow swaps, round tripping. However, creative accounting is
misleading and it is unnecessary. It has negative impact on economic growth.
