Creative accounting is a practice of accounting following the certain rules of it, but it is fluctuated from the basic spirit of those rules. Creative accounting is the ‘colorful’ representation of a company’s assets, liabilities and income. It is basically done to attract investors. The example of ‘the half glass of water’ maybe pulled to explain the idea. If a glass is filled with water to its half volume, then instead of saying ‘it is half empty’, the creative accountants prefer to say ‘it is half full’! Thus the information related to financial situation of a certain company is ‘colored’ by the creative accountants or auditors for building a better image of the company to the stakeholders. To be more precise, creative accounting is the ‘systematic misrepresentation’ of a firm’s true income and asset valuation. It is also the root of all accounting related scandals. The crash of US stock market in 2002 took place due to creative accounting is said by the journalists. One interesting fact about this procedure is, this system was actually first used in a movie named ‘The Producers’ by Mel Brooks in 1968.
The creative accounting concept is generally used when:
a)A company is about to float its shares in the stock market, to manipulate investor’s mind to pay premium per share.
b)A company’s shares are already in market, the firm wants to manipulate the share price by coloring its financial state through creative accounting to enjoy a short term BOOST in price.
c)A company wants to manipulate a certain class of stakeholders for the sake of the firm.
The management willing to use creative accounting finds loopholes in the financial reporting standards and allows the accountants to adjust numbers or figures to increase the income or profit and to decrease the liabilities. Although being in the risk of accusation of being a fraud, the managers prefer this creative accounting concept when the business of the firm is in a ‘downturn’.
It is also practiced in Bangladesh. In this paper we will discuss the situation regarding the global and local application of creative accounting.
As we know, financial statements represent the core information of a firm. It reveals all the data regarding a company’s performance. Trough a financial statement the core information is opened to public as well as stakeholders. Generally it is hoped that, this statement will be made by following certain principles, rules and standard to reflect the actual information. So, it is easily understood, the managers want to use creative accounting also known as earnings management to manipulate peoples mind and establish a better image of the company itself.
Though there are so many restrictions, the managers are attracted to the creative accounting just because of their certain goal and building better pubic image. In fact the popularity of creative accounting is increasing day by day as it boosts in the short term price of shares and the company enjoys a better image. As the market is nowadays, even more competitive, the companies are held under pressure to use creativity in accounting rather than following all the principles and creating the actual financial report.
As the big firms or corporations has so many financial activity each year and their transaction goes on from so many accounts, it is easier for them to find loopholes and color the statement, which will be hard to detect for the auditors as they will not know about the exact loopholes.
After the invention of creative accounting in a Hollywood movie as mentioned earlier, it was very popular back that time, but in the 1990’s frequent report against this creative tool was coming to the authority. And nowadays, the auditors are more cautious about creative accounting as the creative accounting challenges the core ethics of a business.