Among the various stakeholders, investors and potential investors constitute the primary group for whom financial statements are basically intended. Investors put their hard earned money with a firm on the basis of the financial information exhibited by statements and their scrutiny. Therefore, accountants are bound to oblige the rules and regulations of accounting practices in the preparation and presentation of financial statements. These rules are framed by accounting bodies of a country in line with international accounting standards. Nevertheless, some accounting standards are violated by accounting professionals/firms for their personal gain. Such practices are illegal and against the ethics of accounting professionalism. Many such practices have been observed from different parts of the world. Such a practice is known as creative accounting. Creative accounting is a sort of accounting scam, which does not follow the accounting rules and principles as such or finds the loop holes in the accounting rules for the benefit of the preparers and those at the helm of the organization. This essay is meant to detail the basics of creative accounting and the reasons thereof. ...
It is the act of using the skill and knowledge of accounting professionals to make advantage of the loopholes of accounting rules so as to manipulate the financial information and thereby deceive the users of such statements. This term is also coined as aggressive accounting since it involves the destruction of current accounting rules and specifications with the intention of deceiving someone. Though, the ultimate intentions of creative accounting are manifold, the fundamental aim is to give unfair and incorrect information about the company and its operational results.
Numerous interpretations have been developed on the term 'creative accounting' by eminent authors. In the words of John Blake and Jack Dowds, creative accounting may be defined as a "process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business" (Blake). Metcalf, L. (US Senate) in his work (The Accounting Establishment, 1977, p.188), interprets " creative accounting is recognized as a synonym for deceptive accounting. Creative accounting methods are noteworthy because they remain in use as generally accepted accounting principles, even though they have been shown to be deceptive in many cases" (Robb, 2007, sl.3). According to Charles W. Mulford, Eugene E. Comiskey in their famous book entitled 'The Financial Numbers Game: Detecting Creative Accounting Practices', "creative accounting practices --a termthe authorschose to encompass any and all steps used to play the financial numbers game -- may be employed in exchange for a variety of expected rewards. These rewards may include a favorable effect on share prices, lower corporate borrowing costs due to animproved credit rating, ...
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The intention of this study is cosmetic accounting that can be represented by the income smoothing technique. This consists in deliberate using of accounting policies to report the series of income as low from one period to another for the purpose of showing low wealth to shareholders. This way, the management can reduce the net income’s fluctuations from one period to another.
The researcher states that creative accounting is an appalling challenge to the profession of accounting. It is a problem which is not centred to certain specific countries but all the nations of the world. The managers of the companies are motivated to the use of creative accounting practices in financial reporting of the company in many ways as discussed earlier.
Creative accounting is an innovative yet unethical practice that converts the sense of an accounting treatment while being within the scope of treatment prescribed by accounting standards. It can be said that taking advantages of the loopholes present in accounting standards is the other way of explaining creative accounting.
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The manipulations have taken place in different forms. While analysing the creative accounting in the context of Greek, Baralexis (2004) found out that the manipulation of accounting has been well documented in accounting literatures and there are examples of manipulation in account books dating back to 1920s.
Enron has developed into becoming a part of America’s top ten companies in the span of nearly two decades. Their sudden rise to power seemed impossible to many industries in the financial world. However, the scam which brought upon Enron success was discovered.
The notion of Creative Accounting is tied up to the position of its shares, such as (a) when it issues new shares in the market or (b) when it wants its existing shares to be presented in good light in the market so
The first way is when there are alternative accounting policies, and managers can make a choice among these policies. For example, a a manager might be faced with the decision to write off or capitalise research and development costs. The second way
For capitalists, the culture encourages the accumulation of profit; for laborers, it encourages the accumulation of wages; for consumers, it encourages the accumulation of good.” It should be noted that this culture has
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