The third way is by “structuring transations in such a way as to manipulate the results in the financial statements.” An example of this is selling an asset that is artificially depress or boosted. The fourth way that creative accounting can arise is by “timing genuine transactions to as to manipulate accounting.” An example of this is an investment with a cost of f1 million with a market value of f3 million, this profit can be realised in any year of the managers choice. (Oliveras & Amat p. 8). Moreover, hybrid securities can be a source os creative accounting, as these securities combine features of assets and debts, and, although they are better classified as debt than equity, they are often reported as equity on balance sheet, which “creates illusions in financial statements.” (Carlin et al. p. 44). Unfortunately, auditors sometimes allow creative accounting because of the “relevance and reliability...of reported information.” (Rabin p. 67).
Governments can also engage in creative accounting, meaning a “measure implying an improvement in the fiscal balance...if it does not imply an improvement in the intertemporal budgetary position of the government sectgor at large.” (Milesi-Ferretti p. 4). However, this is not the focus of this paper, so this will not be more closely examined.
This paper will examine the prevalence of creative accounting, according to the four hypotheses iterated in this assignment. The first hypothesis is that the prevalence of creative accounting is a result of the deficiencies in the legal systems for banking and accounting. The second hypothesis is that the prevalence of creative accounting is a result of the lack of autonomy in regulatory and supervisory agencies. The third hypothesis is that the creative accounting is a result of a slow and inefficient judicial system. The fourth and last