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Creative Accountancy

The cost model is specified in IAS 16 and requires an investment property to be measured after initial measurement retained earnings at depreciated cost . An entity that chooses the cost model discloses the fair value of its investment property.

For example, property investment companies lobbied hard against SSAP 12 , and got their own accounting standard SSAP 19 . Micro–manipulation, on the other hand, involves creative accounting at an individual entity level, where policies and disclosures are chosen to create a view of reality the company wishes to present e.g. WoldCom – categorising ordinary expenses as capital expenses and inflating revenues to disguises losses. Creative accounting is needed to maintain or promote the share price and create a good profit growth.

To gain benefit from inside knowledge, director of the company engage creative accounting to postpone the release of information to the market. Last but not least, many types of contractual right, obligation and constraints based on the amount reported in the accounts also motivate company to apply creative accounting. The paradox is that the well-intentioned changes in accounting standards open up new opportunities for creative accounting.

What Is Accounting?

Amongst the main objectives of these standards, which were intended to make financial statements easier to understand and provide for more transparency (Alfredson et at 2007, p.6), one of the aims was curtail future opportunities for creative accounting. Theoretically, managers motivation in creative accounting is acceptable. However, certain of companies apply a particular techniques of creative accounting to some extent, for example, applied in non-discretionary component of the bad debts provision. Italian dairy giant Parmalat employed a number of creative accounting and wire fraud schemes before 2003 that lead to the largest bankruptcy in European history. It sold itself Credit-linked notes with the help of Merrill Lynch through a Cayman Islands special-purpose entity and over-accounted for their value on the balance sheet. The publicly listed company stated to investors that it had about $2Bn in liabilities , but once audited more vigorously during the bankruptcy proceedings, it was discovered that the company’s debt turned out to actually be $14.5Bn.

Assets and liabilities may also be manipulated, either to remain within limits such as debt covenants, or to hide problems. As accounting standards, rules, and regulations change, creative accountants need to alter their techniques.

The creative accountant may practice off-balance-sheet accounting or post exaggerated non-recurring items. The accountant may also be over-optimistic regarding revenue recognition.

Sometimes they lower the sales revenue in their books to get rid of taxes, and sometimes they increase the sales figure with some arbitrary transaction to show the revenue of the company to encourage their investors. The management of some of the companies do this type of practice to overstate the inventories’ valuation. They do this to creative accounting definition just show that their cost of goods sold is understood thus tries to show the increased profits that their company is going to earn this year. Some firms may also minimize profits during their good periods to smooth out their results. The aim in creative accounting is to make the company appear financially healthier than it really is.

Creative Destruction

Our company has experienced a decrease in revenue due to the financial crisis. Liabilities are recorded on the right side of the balance sheet, while assets are listed on the left. If you need an accounting dictionary to check specific accounting terms, have a look at this dictionary provided by Accounting Coach, which also offers other valuable tools like quizzes and bookkeeping training topics. After you feel like you really understand the word, try to think of your own example sentences. If the average inventory item value is $350, and there are 10 categories of items, then, using such a creative inventory addition technique, the company can quickly increase the value of its total assets by $350,000. Perhaps, major corporations might consider doing away with bonuses paid out that way. Instead, they might offer performance bonuses based on a non-financial metric.

In relation to the measurement to be used in financial statements subsequent to the date of cost, the standard allows corporations to choose between the cost or the revaluation method . Although regular consultations and improvements to the standards are ongoing, to date it is felt that the measurements still fail in their intention to increase transparency and comparability. This Certified Public Accountant is particularly felt to be the case in terms of property, plant and equipment, and investment property, which will be discussed in the following sections. As indicated earlier, it is also felt that the introduction of the “fair value” concept as a measurement that would reduce the incidence of creative accounting is criticised as not being capable of fulfilling this role.

Proton: Malaysia Automobile Manufacturer Company

(Losses could actually result in a negative income tax expense.) In a year of low profits a corporation might eliminate jobs and postpone maintenance expenses. When profits are higher the corporation will add jobs and perform the maintenance that it had avoided. 1) Accounting principles and rules should be streamlined to reduce diversities of professional judgment in financial reporting; we believe that the adoption of International Financial reporting standard in Nigeria will go a long way to settle this matter. Prior to the settlement on fair value as being the most appropriate measurements, one measure that most academics thought would be favoured by the “Standard setters” was the deprival value approach (Van Ziji and Whittington 2006, p.3.). The intention of this process was to determine the cost of the asset based upon the removal effect that it would have upon the business, in other words what cost would the business incur if it was deprived of that asset. As indicated, many academics thought this method would produce the accurate results. However, the professionals were not of the same opinion and, through the process of consultation and lobbying it was their voice that one the day.

Accountants’ attitudes toward creative accounting depend on whether it is arisen from misuse of accounting principle and manipulation of transactions. Accountants more critic in misuse of accounting principles as accountants duty is on rule-based and it falls within their expertise.

Existence Of Creative Accounting

Most of the available studies in Nigeria such as [1,7-9], did not pay particular attention to the banking industry. The few available studies that focused on the banking industry for instance concentrated their works on banks in locations outside Lagos without giving consideration to the fact that the financial reports of banks are prepared at their head offices. Hence, this study is an attempt to fill existing gap by focusing on Commercial banks head office branches in Lagos.

One has to wonder whether to threat to manipulation and creative accounting had any influence upon the decisions made by professionals. Firstly, many academic have concentrated upon the effect and benefit that creative accounting might have for the one group of stakeholders who are closest to the corporate operations, which would be the management team. The salaries, bonuses and other rewards for most CEO’s and senior management are linked to the performance of the business and, if these performance levels are not reached, the rewards will not be forthcoming. However, there is no negative impact on salaries related to the amount by which targets are missed, for example, whether the results are £1 million of £5 million below target salaries will remain the same. Therefore, if the CEO believes that in a particular year the business will not reach the required target, it is to his or her advantage to shift earnings from that year into the next in order to enhance and improve the potential size of future rewards . We have seen that the main result achieved from using the various methods of creative accounting is to change the revenue, earnings and value of the business, but the real question is for what purpose is being employed?

Amazon and the Amazon logo are trademarks of Amazon.com, Inc, or its affiliates. We also participate in other affiliate advertising programs for products and services we believe in. It recommends examples and videos to you based on the words you’ve already learned. In order to see what a company’s ___(7.) is/are, you need to have a look at the ___(8.) and subtract all the expenses of doing business. Creativa has professional actors and goes deep on body language and intonation.

According to while this practice is called creative accounting in UK, it is known as Earnings management in the USA. They further stressed that terms such as “aggressive” or “innovative” or “cosmetic” or “deceptive” accounting are also used in referring to creative accounting. 3) Streamlining accounting principles and rules to reduce diversities of professional judgment in financial reporting will not minimize creative accounting practices. 3) To examine whether streamlining accounting principles and rules to reduce diversities of professional judgement in financial reporting can minimize creative accounting practices. The intention of this study is to investigate the arguments and debate that continues to surround the concepts and practices of creative accounting and the impact, if any, that “fair value” has had upon this issue.

Foe example, if a particular item of equipment cost £10,000 and its life expectancy within the firm was set at 5 years, that asset would depreciate at £2,000 per annum. The argument against this system is that during the course of the previous four years the true value of the asset was not being reflected in the financial statements and this had an adverse effect on the value of the firm .

• It is a means through which information about a business entity is communicated.
• Although regular consultations and improvements to the standards are ongoing, to date it is felt that the measurements still fail in their intention to increase transparency and comparability.
• This is particularly seen to be the case in terms of business assets (Antill and Lee and Stolowy and Breton ).
• The practices are characterized by excessive compilation and the use of novel ways of characterizing income, assets, or liabilities with the intent to influence readers towards the interpretations which are desired by the authors of the reports .
• It is also advised that this process should be carried out at regular intervals and certainly close to the date of the financial statements preparation.
• Accountants should follow their general guidelines such as consistency, comparability, neutrality, full disclosure and conservatism.

The accounting and accounting practices have to be consistent and show to the investors that it is following the ethical practices in all its financial dealing as well as reporting. Typical creative accounting tricks include off balance sheet financing, over-optimistic revenue recognition and the use of exaggerated non-recurring items. Creative accounting is an accounting practice that helps the company to deviate the profits, revenues for the year by following rules and regulations.

They need to ensure that the accounting profession rest on ethical principles and values, commanding national and international respect and confidence, by stopping the evil practice of creative accounting. It was also observed that the major reason for the practices of creative accounting in Nigeria commercial banks is to boost the market value of shares.

A typical aim of creative accounting will be to inflate profit figures. Some companies may also reduce reported profits in good years to smooth results.

Author: Mark Kennedy

Categories: Bookkeeping

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