The nature, incidence and ethical issues of creative accounting

Topics: Financial statements, Creative accounting, Accounting scandals Pages: 12 (4392 words) Published: October 23, 2013
The nature, incidence and ethical issues of creative accounting 1.1 Introduction
Creative accounting is also called “Earnings management” which is known as the manipulation of financial information. The term can be defined in many ways. Initially we define it as 'a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business' (Naser, 1993, p.59). Creative accounting, at root, is the origin of numerous accounting frauds. Many accounting scandal cases (like the scandals in Enron, WorldCom, and other firms) in the past few years had happened with the result of collapse. Most of these scandals were conducted by the senior management of organisations and many victims include the employees, shareholders as well as the society had been suffered from these fraudulent cases. Therefore, it draws our attention to why and how a company may use the creative accounting to commit its so-called “window dressing” (Ghosh, 2010, p.2). This research will explore the nature, incidence and techniques of creative accounting as well as how it works. This research will first review the previous literatures to find out the certain definitions of creative accounting by various authors. Then it will look into what motivate people to commit creative accounting and techniques applied to commit creative accounting. The next is looking into the measures and responsibilities of detecting and combat creative accounting. In the rest we will discuss the key findings, recommendations and conclusion of this research. 1.2 Literature Review

There are various views of the definition of creative accounting by different scholars. Copeland (1968) defines it ‘Involves the repetitive selection of accounting measurement or reporting rules in a particular pattern, the effect of which is to report a stream of income with a smaller variation from trend than would otherwise have appeared'. Griffiths (1986:1) presents his point of view that: “Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order to protect the guilty. It is the biggest con trick since the Trojan horse. . . In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting.” Naser (1993, p. 59) defines creative accounting as “the transformation of financial accounting figures from what they actually are to what preparers desire by taking advantage of the existing rules and/or ignoring some or all of them”. It is the procedures of playing the financial numbers by skilfully applying the accounting standards and the selection of measurement and disclosure choices to achieve the financial performance which a company expected. Klein (2002) illustrates ‘Whereby the true financial performance of a company is distorted by managers for private gains'. The above series of definition presented by various authors who although from different decades, their basic perspective towards creative accounting reach consensus. They agree that the primary concept of creative accounting is ‘a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business'.

1.3 Motivations of Creative Accounting
Numerous scholars have researched on the issue of what motivate the behaviour of creative accounting towards the management. Mulford and Comiskey (2002) identified various positive effects the managers would receive from manipulating figures. They show that “the rewards may be any of the following: lower corporate borrowing costs as a result of an improved credit rating, favourable effect on share prices, political gains, and/or incentive compensation plans involving stock option or profit-sharing for top management and key employees which are tied to...
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