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Advanced Financial Reporting - Prevalence of Creative Accounting - Essay Example

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Introduction. 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…
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Advanced Financial Reporting - Prevalence of Creative Accounting
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Advanced Financial Reporting - Prevalence of Creative Accounting

This report will be evaluating the reasons that give rise to creative accounting by organizations; the grounds for the nativity of this practice will also be discussed. The evaluation of the efforts made by existing standards and accounting practices in controlling and reducing aggressive accounting will be catered in the report. The levels of success achieved by regulatory bodies will also be discoursed. Increasing the complexity of accounting treatments in such a creative and aggressive way, actually results in deviation from the actual spirit of the suggested treatment. Transactions are treated with a high level of quibble and in a complex manner so as to obtain desired misrepresentation of items present in financial statements, such as assets, liabilities, expenses, revenue, and stock options. It is generally successfully applied over the transactions of inherently complex items of financial statements, for example Derivatives, Hedge accounting, leases, insurance contracts, construction contracts, financial instruments, impairment of assets, revenue recognition and manipulation can easily be made. Reasons for using Creative Accounting Creative accounting aims to manipulate ultimate shareholder’s wealth, showing high paper profits, and hiding right earning figures from stakeholders (Farlex 2011). Those who are involved in creative accounting are usually personnel having excess to accounting documents, or can influence the accounting treatments. The records and accounts are falsified and wangled as to divert the route of organization’s money to individual intended pockets. There are some obvious motivations, which lead to the commencement of creative accounting by managers or directors. The business corporate and other borrowers search for capital beyond their home land; this gives rise to an increase in the foreign investment. The investors must be supported with high level investor protection measure and market integrity because there is a significant gap between the investor and the borrower that increases the chances of and may lead to dishonesty (Security and Exchange Commission 2000). Creative accounting provides assistance to businesses to appear profitable and attract customers, resources, and investors. It proves to be more costly when deceptive accounting leads to drastic consequences. Methods of Creative Accounting In an organization where salaries and incentives are paid on the basis of performance (performance related pay), directors can manipulate the annual sales account by showing high sales value or reduction in the figures of liabilities as to pay themselves high remunerations and incentives. Directors can also create high provisions for remote liabilities and include under the head of assets account remote or possible future assets, this treatment of assets and liabilities will be against the bench marks described by standards but if the liability and asset heads are intensely populated then, it will be difficult to locate this non compliance. Other minor non-compliances in the financial statements can result in a material non-compliance in the aggregated form. Directors can also change the policies relating to share options and take advantages like bed and breakfasting shares. Job security concerns can also cause highly designated individuals to falsify accounts in the periods of unfavorable results. To cover up previous frauds, original accounts become compulsory to be replaced by fake accounts using creative accounti ... Read More
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