Creative Accounting
Creative Accounting
AC4001
12/13/2013
‘Many investors now believe that companies can manipulate their accounts more or less at will, with the aim of producing profits that increase steadily over time. Provisions are bumped up in good years and later released, or the value of an acquisition is slashed; there are plenty of tricks.’
In your opinion is it possible to eliminate creative accounting?
I do not think that creative accounting practice can be eliminated completely. However, I do feel that there are many precautionary measures that can be taken in order to discourage directors from engaging in this practice. In this essay, I will discuss the reasons for creative accounting and show some real world examples of where it has been used and its effects.
Creative accounting can be defined as accounting practice that follows the required regulations, but deviates from what those standards intend to accomplish. It is often aggressive accounting or involves questionable accounting techniques. Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company and to hide its true financial state. Although creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviours. Creative accounting may include selling assets with a low cost basis, shipping unusually large quantities of product near the end of the year, and failure to write down inventories that have declined in value.
Reasons for creative accounting practice:
In Nasar’s book ‘Creative financial accounting’, a survey was conducted to determine the main reasons behind the use of creative accounting. The results showed that the main reasons management partake in creative accounting was to meet limits on borrowing and gearing ratios. Other reasons included the desire to control dividends and reduce tax, and due to pressure from the big institutional investors. Nasar feels that the results
AC4001
12/13/2013
‘Many investors now believe that companies can manipulate their accounts more or less at will, with the aim of producing profits that increase steadily over time. Provisions are bumped up in good years and later released, or the value of an acquisition is slashed; there are plenty of tricks.’
In your opinion is it possible to eliminate creative accounting?
I do not think that creative accounting practice can be eliminated completely. However, I do feel that there are many precautionary measures that can be taken in order to discourage directors from engaging in this practice. In this essay, I will discuss the reasons for creative accounting and show some real world examples of where it has been used and its effects.
Creative accounting can be defined as accounting practice that follows the required regulations, but deviates from what those standards intend to accomplish. It is often aggressive accounting or involves questionable accounting techniques. Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company and to hide its true financial state. Although creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviours. Creative accounting may include selling assets with a low cost basis, shipping unusually large quantities of product near the end of the year, and failure to write down inventories that have declined in value.
Reasons for creative accounting practice:
In Nasar’s book ‘Creative financial accounting’, a survey was conducted to determine the main reasons behind the use of creative accounting. The results showed that the main reasons management partake in creative accounting was to meet limits on borrowing and gearing ratios. Other reasons included the desire to control dividends and reduce tax, and due to pressure from the big institutional investors. Nasar feels that the results
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