1.0 INTRODUCTION

1.1 Background:

Subject of Creative Accounting is normally portrayed maligned and negative act. As soon

as these words “Creative Accounting” are mentioned, the image that emerges in one’s

mind is that of manipulation, dishonesty and deception. According to agency theory ‘the

firm is a legal fiction which serves as a focus for a complex process in which the

conflicting objectives of individuals are brought into equilibrium within a framework of

contractual relations.’ Within the agency framework, it is both logical and inescapable

that management behavior will be self-serving. Agency can, therefore, provide a solid

framework for the understanding of creative accounting behavior. However, it may

provide an incomplete theoretical basis for explaining or predicting management

behavior; the ethical dimension of human behavior may provide an important element

missing from legalistic and adversarial agency relationships.

The informational perspective is a key element underpinning the study of the creative

accounting phenomenon. A conflict is created by the information asymmetry that exists in

complex corporate structures between a privileged management and a more remote body

of stakeholders. Managers may choose to exploit their privileged position for private gain,

by managing financial reporting disclosures in their own favor. The informational

perspective assumes that accounting disclosures have an information content that

possesses value to stakeholders in providing useful signals.

It may be difficult or impossible for individual stakeholders to discern the fact and the

effect of accounting manipulation, because of an insufficient personal skill set,

indifference or an unwillingness to engage in detailed analysis. From a market efficiency

perspective such failures in understanding may not matter. (Breton and Taffler, 1995)

point out in the conclusion to their study establishing that analysts’ perception of creative

accounting devices is somewhat deficient, only a small number of effective accounting

experts may be required ‘for the market as a whole appropriately to process window

dressed numbers’. On the other hand, (Healy and Wahlen, 1999) cite studies that find that

creative accounting

1

prior to equity issues does affect share prices, suggesting that investors do not necessarily

see through creative accounting.

1.2 Definitions of Creative Accounting:

Creative accounting is referred to also as income smoothing, earnings management,

earnings smoothing, financial engineering and cosmetic accounting. The preferred term in

the USA, and consequently in most of the literature on the subject is ‘earnings

management’, but in Europe the preferred term is ‘creative accounting’ and so this is the

term that will be used in this paper. It should be recognized that some accounting

manipulation involves primarily balance sheet rather than earnings management.

Definitions of creative accounting vary, and include the following:

‘Is the deliberate dampening of fluctuations about some level of earnings considered to be

normal for the firm.’ (Barnea et al., 1976)

‘Is any action on the part of management which affects reported income and which

provides no true economic advantage to the organization and may in fact, in the long -

term, be detrimental’. (Merchant and Rockness, 1994)

‘Involves the repetitive selection of accounting measurem ent 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’. (Copeland, 1968)

(Schipper, 1989) observes that ‘creative accounting’ can be equated with ‘disclosure

management’, ‘in the sense of a purposeful intervention in the financial reporting

process.’

In this paper we will consider that creative accounting involves a transformation of

financial accounts using accounting choices, estimates and other practices allowed by

accounting regulation.

2

1.3 Literature Review:

The concept of creative accounting is usually used to describe the process through which

the accounting professionals use their knowledge in order to manipulate the figures

included in the annual accounts. Accounting has been defined as “the art of faking a

balance sheet” (Bertolus J.), “the art of calculating the benefits” (Lignon M.), “the art of

presenting a balance sheet” (Gounin L.), or “theart of saving money” (Ledouble D.).

The creative accounting appeared in the Anglo-Saxon literature in the 1970s, most often

in the papers about the bankruptcy of enterprises and those written by (Watts and

Zimmerman, 1978, 1986, 1990) which represent the foundation of the positive accounting

theory. This research trend made the object of several empirical works trying to explain

the accounting choices starting from the problem of the political costs that the

enterprises are exposed to. More recently, (Brown and Steele, 1999) have selected a

portfolio of 12 accounting techniques, combining also the accounting options with the

management decisions. In addition to the political costs, it is emphasized the importance

of the activity and risk sector and that of the firm operation, as significant determinants of

the creative accounting.

According to Colasse, creative accounting is defined as a cumulus of accounting

information practices, at the limit of legitimacy, practiced by some economic entities in

order to beautify the image of the financial position and the economic-financial

performances. Also, Colasse states the fact that these practices arise as a result of the

normalization limits but also as a result of the fact that the human creativity does not have

limits. We retain the following remark: “it would be wrong to believe that the

regularization and the normalization present objectively the accounting portrait of the

enterprise. They reveal, explicitly, only the manner in which this portrait has been

painted. On the other side though, they leave to the account preparers a

manipulation line, in the same time indispensable and irreducible, that they can use

according to the considerations deriving from the enterprise’s financial policy or the

communication policy.” (Colasse, quoted by Raybaud – Turillo and Teller, 1996).

3

Almost in the same manner, (Trotman, 1993) defines creative accounting, appreciating

that it is a communication technique having in view the amelioration of the information

provided to the investors. Thus, the economic entity is presenting to the investors or to

the prospective investors financial statements passed through the filter of some

techniques capable of generating a more favorable image on the market but also the

illusion of some more attractive results that the normal.

Defining creative accounting through a well-known practice, that is “the result of

smoothing(smoothing income), (Barnea, Ronen and Sadan, 1976) appreciate that this

makes its presence felt each time the profits have a high fluctuation, unjustified through

the economic reality.

A complex vision is provided by (Naser, 1993) in whose opinion, creative accounting is:

“1) the process through which, due to the existence of some breaches in the rules,

accounting figures are manipulated and, taking advantage of the flexibility, they choose

those measurement practices allowing the transformation of the synthesis documents

from what they are supposed to be into what the managers want; 2) the process

through which the transactions are structured in such a manner that it allows the

“production” of the “desired accounting result.”

Some authors define creative accounting as “an assembly of procedures having in view

the change of the level of the result in order to increase or decrease, or present the

financial statements, without these objectives being reciprocally excluded” (Stolowy,

2000). For others, creative accounting is represented by “the assembly of techniques,

operations and freedom spaces provided by the accounting texts which, without

distancing from the accounting norm and strictness, allow the managers of an enterprise

the change of the value of the result or the change of the aspect of the accounting

documents” (Gillet, quoted by Shabou and Boulila Taktak, 2002).

As a journalist, (Griffiths, 1986) noticed that the majority of the economic entities hide

their benefits. He appreciates that the financial statements are drawn up based on

4

the “embellished” registers, the resulted figures being changed in order to protect the

guilty. Creative accounting is presented as a legitimate fraud.

From practitioner’s perspective, (Jameson, 1988) appreciates the fact that accounting

process in its essence, requires the operation with different motivations, different ideas.

From this diversity arise manipulation, cheating and falsification at some less scrupulous

accounting members. It is he who states that these creative accounting practices do not

break the law or the accounting standards, therefore they comply with the law but not its

spirit. Jameson states thus the negative character of creative accounting which distorts the

enterprise’s financial results and the position, misleading the users of the accounting

information.

From the perspective of a financial analyst, (Smith, 1992) considers that the highest part

of the economic growth of the ‘80s is “due” to creative accounting, that is to the

accountants’ skills than rather to a real economic growth. In the book, Accounting

for Growth, he motivates the previous idea, exemplifying the cases of some British

companies which use creative accounting practices (finding concrete proofs at 45

economic entities of great Britain), taking the example of three companies which

experienced the financial collapse shortly after they had presented their financial

statements which clearly reflected: financial stability.

Defining creative accounting, (Merchant and Rockness, 1994) appreciate that any

action come from the management which can distort the profits and which is not a

consequence of the economic reality, it actually represents the privilege of the

financial engineering. They draw the attention on the fact that on long term all these

forced approaches can have a negative effort on the financial stability of the economic

entities.

Defining creative accounting through its practices, (Shah, 1996) as well as (MacBarnet

and Whelan, 1999) appreciate that all those financial engineering used in order to

create the image desired, the representation desired are called instruments of

creative accounting. One year later, Shah actually defines the concept of creative

accounting and the emphasis is placed on the fact that the management of the enterprise

5

uses the legislation’s breaches or the ambiguities in order to create their own

portrait of the enterprise, according to their preferences, in other words the

financial performance is obtained through the use of the breaches in the

legislation. The author emphasizes the idea that creative accounting does not break the

law but only its spirit.

Creative accounting is used, according to the opinion issued by (Burlacu and Pătroi,

2005) and for the “consolidation” of the economic-financial indicators of the economic

entities, distorting yet their informational content. It is appreciated that in this way the

consistency and truthfulness of the accounting information sent by the economic entity to

the business environment is being altered.

Romanian literature is poor in what the interest regarding creative accounting is

concerned. (Feleaga and Malciu, 2002) stated that creative accounting was defined as a

process through which the accounting professionals use their knowledge in order to

manipulate the figures contained in the annual accounts.

Although there are misunderstandings regarding the definition of creative

accounting, the majority of researchers accept the idea that this stands out through two

aspects. The first aspect has in view the use of the accounting professionals’

imagination in order to translate those juridical, economic and financial innovations for

which there are no normalized accounting solutions at the time of their occurrence. The

second aspect shows the fact that the adjustments resulting from this financial engineering

are initiated according to their incidence on the enterprise’s balance sheet and results.

1.4 Problem Statements:

For many years, people have debated about creative accounting which is widely used to

describe accepted accounting techniques which permit corporations to report financial

results that may not accurately portray the substance of their business activities.

Creative accounting and earning management are euphemisms for accounting practices

that tend to circumvent, albeit, cleverly, or manipulate the rules of standard accounting

practices or the spirit of those values (Barnea, Chamberlain and Marlinton, 1976). They

6

are characterized by dubious complications and use of ‘novel’ ways of presenting income,

assets or liabilities.

There are many reports of price manipulation, profit overstatement, and accounts

falsification by some dubious stewards which rendered the financial reporting ineffective.

The business failures of the past decade however, have been closely associated with

corporate governance failure which involves a number of parties, management board of

directors, auditors and some investors (Ezeani, 2010).

Most business organizations have always been connected with fraud and have always

been affected by financial collapses. Recently, accounting scandals like Enran, World

Com, Parmalat, Tyco, etc. have cost not only billions of dollarsto the stakeholders but

also have damaged the accounting profession as a result of financial

misrepresentation.

Most of the standards set for the accounting (Audit) report have been eroded. According

to (Osisioma and Enahoro, 2006), accounting processes and choice of policies resulting

from many judgments at the same time are capable of manipulation, which have resulted

in creative accounting. The differences which are observed in financial reporting are

legitimately prepared from choice of varied accounting polices of the same organization

for the same period, has brought about challenges of credibility to accounting (finically

statements and reporting).

1.5 Objectives:

We have prepared this report based on two purposes. Those are:

1.5.1 Broad objective:

The report aims to provide an in-depth knowledge in the field of creative accounting.

1.5.2 Specific objectives:

7

a) To understand the creative accounting practices.

b) To identify of the protagonists.

c) To analyze the main phenomena.

d) To suggest some ideas for reducing the practice of creative accounting.

1.6 Rationale of the Study:

We are MBA 1st year 1st semester students. After two years, we will be going to job

market and competing with other universities’ graduates for getting a suitable job. As

business students, it is very important for us to know how to prepare a business report.

We have prepared this report on Creative Accounting acquiring the in depth knowledge

about the practicing of Creative Accounting. This will provide us an extraordinary

opportunity to know about a tricky abuse of accountancy. Using this report, we will be

able to measure the deviations between actual accounting and creating accounting

practices. So, we have the same opinion that, this fruitful report not only assure

reasonable grade mark in our curriculum result but also assure well-done feedback as

sound knowledge.

1.7 Scopes of the Study:

There is a certain boundary to cover this report. Our particular report only covers some

aspects regarding Creative Accounting. We mainly focus on the practice of this

fraudulent system. And we also cover the literature review, techniques of creative

accounting, motivation for Creative Accounting and also the ethical perspective of

Creative Accounting.

1.8 Limitations of the Study:

We are lucky enough to get a chance to prepare a report on “Creative Accounting” We

tried heart & soul to prepare a well-informed report. But unfortunately we faced some

difficulties when preparing this report. We tried to overcome the difficulties. In spite of

trying our level best, some difficulties that hamper our schedule report work:

8

Within a short time, we need to prepare some other courses’ reports for in this

semester. For this reason, we could not get a fluent time schedule for the report.

Related research articles was not so available. This was a great hindrance to

prepare this report.

The concept of Creative Accounting was new for us. That is why we had to

prepare this report depending upon some hazy ideas.

2.0 METHODOLOGY

2.1 Data Collection and Analysis:

The object of the current article refers to the presentation of the conceptual delimitations

regarding creative accounting, the detailed description of theoretical framework proposed

by some authors, as well as the brief review of the literature written on the topic between

1999 and 2009. Also, we can see how the specific literature regarding the aspects

concerning the magical land of creative accounting becomes day by day even richer,

not little guilty by this thing being the financial scandals and the recent economic

crisis we are experiencing (are we going to get over it?) we have decided to shortly

review the main aspects approached at the European level regarding the role that

creative accounting is playing in this “play”. To achieve this aim, we analyzed

approximately 40 academic articles available in three scientific databases, Science Direct,

Emerald and ProQuest. The choice of these three sources is motivated by the presence

here of all the articles having in view a very good quality international research and the

English language to present them. Our approach regarding the exploratory research

includes two stages:

The first consists in finding the information about creative accounting in the

databases mentioned above the longitudinal classification of the selected articles – the

interval had in mind being contained between 1999 and 2009.

The second stage consisted in grouping them on the most frequently approached themes.

Out of these, we mention aspects connected to different accounting techniques/practices

9

in the context of some bankruptcies, by their influence on the financial markets

transactions and aspects connected to the problems of audit and corporative governance.

In our research, we have used the deductive method (the attainment of the conclusions

based on the already existing theories), the type of research used being the fundamental

one. The utility of such a research contributes to the insurance of the premises for the

development of future research.

3.0 FINDINGS AND ANALYSIS

3.1 Motivation for Creative Accounting:

Various research studies have examined the issue of management motivation towards

creative accounting behavior. People are motivated for creative accounting for:

a. To meet internal targets

b. Meet external expectations

c. Provide income smoothing

d. Window dressing for an IPO or a loan

e. Taxation

f. Change in management

Half a century ago, (Hepworth, 1953) identified several motivations including the

existence of tax levies based on income, confidence by shareholders and workers in

management that is able to report stable earnings and psychological expectations relating

to increases or decreases in anticipated income. Tax is mentioned as a significant

motivator also by (Niskanen and Keloharju, 2000) in a Finnish context and in Japan by

(Herrmann and Inoue, 1996).

In countries with highly conservative accounting systems the 'income smoothing' effect

can be particularly pronounced because of the high level of provisions that accumulate.

Another bias that sometimes arises is called 'big bath' accounting, where a company

10

making a bad loss seeks to maximize the reported loss in that year so that future years

will appear better.

(Beidleman, 1973) observes the positive effects of income smoothing on expectations,

securities valuation and some element of risk reduction for analysts. Other motivations

for creative accounting discussed by (Healy and Wahle, 1999) include those provided

when significant capital market transactions are anticipated, and when there is a gap

between the actual performance of the firm and analysts’ expectations.

A variant on income smoothing is to manipulate profit to tie in to forecasts. (Fox, 1997)

reports on how accounting policies in some companies are designed, within the normal

accounting rules, to match reported earnings to profit forecasts. When these companies

sell products a large part of the profit is deferred to future years to cover potential upgrade

and customer support costs. This perfectly respectable, and highly conservative,

accounting policy means that future earnings are easy to predict.

Company directors may keep an income- boosting accounting policy change in hand to

distract attention from unwelcome news. (Collingwood, 1991) reports on how a change in

accounting method boosted a company’s quarterly profit figure, by a happy coincidence

distracting attention from the company slipping back from being the largest company in

the industry in the USA to the number two slot.

(Healy, 1985) examines managers’ earnings manipulations motives where executive

compensation is linked to income measurement. (Trueman and Titman, 1988) discuss

managers’ motivations to reduce the perception of variability in underlying economic

earnings of the firm. (Kamin and Ronen, 1978) observe a difference in motivation

between managers in owner- controlled and management- controlled firms. Owners who

wish to retain control of a sizeable stake and who are therefore not interested in

immediate exit strategies are less likely to be motivated to manage earnings.

Creative accounting may help maintain or boost the share price both by reducing the

apparent levels of borrowing, so making the company appear subject to less risk, and by

creating the appearance of a good profit trend. This helps the company to raise capital

11

from new share issues, offer their own shares in takeover bids, and resist takeover by

other companies.

If the directors engage in 'insider dealing' in their company's shares they can use creative

accounting to delay the release of information for the market, thereby enhancing their

opportunity to benefit from inside knowledge.

It should be noted that, in an efficient market, analysts will not be fooled by cosmetic

accounting charges. Indeed, the alert analyst will see income- boosting accounting

changes

as a possible indicator of weakness. (Dharan and Lev, 1993) report on a study showing

poor share price performance in the years following income increasing accounting

changes. Another set of reasons for creative accounting, which applies to all companies,

arises because companies are subject to various forms of contractual rights, obligations

and constraints based on the amounts reported in the accounts.

3.2 Techniques of Creative Accounting

In this section techniques used for creative accounting and/or earnings management will

be explained based on different studies in the literature.

- Recognizing Premature or Fictitious Revenue: As (Mulford and Comiskey, 2002)

asserts, creative accounting practices often begin with revenue recognition, because

of its direct impact on earnings. They defined premature revenue recognition as

recognition of revenue for a legitimate sale in a period prior to that called for by

generally accepted accounting principles. On the contrary, fictitious revenue recognition

is the recording of revenue for a nonexistent sale.

- “Big Bath” Accounting: According to Jones (2011), big bath is a managerial strategy

to get rid of all the bad news in one go. In this technique managers write off as many

costs as possible in the current period, so that the future performance looks better. It is

widely used in acquisition accounting and in takeovers.

12

- Using Cookie Jar Reserves: It refers to over-provisioning for accrued expenses when

revenues are high, so that profits can be brought down to a level that is safe to maintain

in the future. It also includes failure to provide all the accrued expenses to show larger

profits during tougher times when needed (Shah and Butt, 2011). As Levitt (1998) states

this technique includes making unrealistic assumptions to estimate liabilities for such

items as sales returns, loan losses or warranty costs, so that they stash accruals in cookie

jars during the good times and reach into them when needed in the bad times.

- Aggressive Capitalization and Extended Amortization Policies: One alternative

way for companies to reduce expenses is aggressively capitalizing expenditures that

should have been expensed. Although determination of the portion of an expenditure

to capitalize is straightforward in many cases, items as direct-response advertising and

software development costs require judgment in determining whether capitalization is

appropriate or not. To lengthen amortization periods for costs that have been capitalized

previously is also used to reduce expenses and boost earnings (Mulford and Comiskey,

2002).

- Manipulating Inventory: Firms can engage into inventory manipulation by either

manipulating the quantity of the inventory or by valuing it. In years when profits need

to be increased the quantity can be manipulated by doing a particularly rigorous stock-

take. Provisions for absolute and slow-moving inventory and changing the actual

method of inventory valuation are the practices of manipulating inventory values

(Jones, 2011).

- Abuse of Materiality Concept: It includes misusing the concept of materiality by

intentionally recording errors within a defined percentage ceiling. Firms indulging in

this practice try to find an excuse for it by arguing that the effect on the net income is

too small to matter (Levitt, 1998).

- Being Generous with Bad Debts: Companies, which are based on credit sales, make

13

provisions for bad and doubtful debts based upon their judgment. Thus, when they

want to increase their profits, managers can forecast that there will be a very low level

of non- payment (Jones, 2011).

- Getting Creative with the Income Statement: It includes the practice of

communicating a different level of earning power using the format of the income statement

rather than through the manner in which transactions are recorded. For example, companies may

report a nonrecurring gain as “other revenue,” a recurring revenue caption, or a recurring

expense might be labeled as nonrecurring. This will result in higher apparent levels of recurring

earnings without altering total net income (Mulford and Comiskey, 2002).

- Problems with Cash-flow Reporting: Another way for companies to communicate a

higher earning power is reporting higher and more sustainable cash flow. A

company’s apparent earning power will be greater with the potential recurring quality of

operating cash flow. Therefore, a firm can classify an operating expenditure as an

investing or financing item, or investing or financing inflow might be classified as an

operating item. Even if these steps will not alter the total change in cash, they will

increase the cash flow from operations (Mulford and Comiskey, 2002).

3.3 The Ethical Perspective:

Companies desire to show the report with the profit grow steadily. This report is

done by having stipulation for liabilities and opposing assets value during good years

so that the reported profit can be improved in bad years. The purpose of this method is

to evaluate the sources generate in following years and prevent unachievable

expectations. However, the investors have the right to be informed on the violation

of trading provisions and the effects of income smoothing in profit trend.

Revsine (1991) considers the main function of accounting is to supervise the contracts

between managers and groups who provide the finance so that the market

mechanisms function efficiently and able to pinpoint the possibilities in creative

accounting. The text about the ethics of bias in the accounting policy regarding on

creative accounting is evaluate at both ‘macro’ level of accounting regulator and

14

‘micro’ level in the management of individual.

Ruland (1984) differentiated the deontological view and teleological view which

deontological view is where the moral rules apply actual actions whereas teleological

view is action should be evaluated on the moral worth of outcome. However, Revsine

(1991) tends to perceive deontological view in public sector and teleological view in

private sector. Ruland (1984) also talk about difference between ‘positive’

responsibility and ‘negative’ responsibility. ‘Positive’ responsibility is the responsibility

to exhibit unbiased account while ‘negative’ responsibility is the managers’

responsibility for the state of affairs which they fail to avoid. Ruland thinks that

‘duty to refrain’ that involves preventing the bias inherent in creative accounting is

more critical because of the three issues which are relentlessness, certainty of

outcome and responsibility.

Creative accounting seems morally doubtful for those professional accountants.

According to Price Waterhouse senior partner’s observation (Conner1986:78),

fraudulent reporting normally occurs among those above management level in which

effective internal control are designed. Financial statement are commonly used to

generate the delusion that company is in better condition than it actually is by

misapplication of the accounting principles to cover the economic realities.

Fischer and Rosenzweig (1995) and Merchant and Rockness (1994) discovered that

accountants are favorable in violating the accounting rules while students are favorable in

manipulating the transactions. The reasons are accountants may obtain rule-based

approach to ethics and think that the violating of accounting rules is under their job

scope which ethical judgment demanded.

Merchant and Rockness discovered that motivation of management impact the

accountants’ attitudes to creative accounting. This motivation was to advance the

company. Accountants and managers who protest the creative accounting might face

the risk of ruining their reputation. Schilit (1997) reports case where the accountant’s

employer, food wholesaler who capitalizes the slotting expense and amortize it for ten

years. The accountant noticed that the employer was against the accounting treatment.

15

Therefore, he notified the auditors to force the company expense but amortize the

slotting. The company unable to pursue the auditors approves the capitalization of

slotting costs. Later, the accountant was set off for the reason contrast with the

employer judgment. To avoid having the same fate with that accountant, there are

some suggestions such as verify the acceptability of the accounting method and do

not interrupt something which is legal to avoid offense. In addition, the accountant

should present legal method to attain favorable outcome to the management and

mistreatment should report to the appropriate supervisor.

16

The principal investor in the company tried, unsuccessfully, to put pressure on the

auditor to support the capitalization of the slotting costs. Shortly after the accountant

was sacked for taking this stand. The series of actions in this case are revealing:

1. Check that the proposed accounting method is in fact unacceptable. As Hamilton

advises.

2. First, try to verify your suspicions about what you think are wrong. Some

accounting practices that are legal under new laws may look suspect to a non-

accountant. If you blow the whistle on something that's not illegal, you're really

bare and perhaps even vulnerable to defamation claims.

3. Search for alternative legitimate ways to achieve the desired end and offer these as

an alternative approach to management.

4. In the last resort, report the abuse to the appropriate monitor.

17

4.0 RECOMMENDATIONS

4.1 Suggestions:

It seems clear that in general creative accounting is seen as a deceitful and undesirable

practice. In this section we analyze some measures which can help to reduce the scope

for creative accounting practices, identifying, where applicable, recent developments in

International Accounting Standards (IASs). IASs will become the standard for all

European listed companies from 2005. Accounting regulators who wish to curb creative

accounting have to tackle each of these approaches in a different way:

1. Auditor can play an important role in prevention and detection of creative

accounting practices. If company’s auditor is well establish entity and has good

track record then its auditing process may be trusted. But that auditor should not be

the only auditor of the company, there should be more than one auditor and that also

should be rotated periodically. So that familiarity between company and auditor

does not lead to decrease in objectivity.

2. Proper system should be introduce to educate investors about the financial terms

and its probable impact on financial position through providing booklet of methods

adopted by the proposed company for various items in different situations and

expected changes in special circumstances

3. Existence of artificial entities should be carefully checked by its actual presence and

actual business transacted through it.

4. Companies which are allowed to enter into Indian market via mergers and

acquisition or any other mode should be clearly examined; their financial

statements should be checked through two or more independent auditors under the

supervision of government for preventing fraudulent activities to come into

Indian market.

5. Close examination of those transactions which are changed in special

circumstances and reason behind it. And transactions with related parties should

18

also be examined thoroughly.

6. Laws and regulations laid down by government should be strictly followed by

imposing heavy penalties in case of non-application of such rules.

7. Introduction of gifts and rewards for employees for their participation in

management and motivate them to disclose any manipulations going on in the

company records by anyone can also work in eliminating or reduction in creative

accounting practices.

8. Indian law has a major problem of slow trail and delay in investigation which

reduced the materiality of the case and hence motivates others to follow the same

practices. Through fast trial and quick investigation can reduce the number of

accounting fraudulent practices.

19

5.0 CONCLUSION

5.1 Last Words:

Our research deals with conceptual and motivational aspects of the appearance and

development of creative accounting practices. The concept of creative accounting is

analyzed in its evolution, To understand the meanings of the concept mentioned,

our study describes in detail a theoretical framework proposed by some authors but

also the objectives of the accounting figure manipulation. Also, there are

descriptions of the actors of this “game” of creative accounting, of the conditions

generating different accounting manipulation practices and not in the least the

“manipulation”

Being aware of the limitations of our research, we will concentrate our efforts on a

more deepened analysis of the famous cases of creative accounting and fraud and

on the other circumstances which it is never known when they might give birth to

some manipulations in order to distort the real image of the enterprises’ financial

statements. For this, the study of literature must be more ample in time and space

and it should clearly emphasize the areas uncovered by the existing literature in

order to see which elements are worth studying with propensity.

20

Bibliography:

Barnea, A. Chamberlain, S. L. and Marliton, J. (1976). Managing Financial Reports of

Commercial Banks: The Influence of creative accounting and earnings management.

Journal of Accounting Research, 33 (2) 231 –261.

Barnea, A., Ronen, J. and Sadan, S.: 1976 ‘Classificatory smoothing of income with

extraordinary items’, The Accounting Review, January, pp.110 - 122.

Beidleman, C. R.: 1973 ‘Income smoothing: the role of management’, The Accounting

Review, October, Vol. XLVIII, pp. 653- 667.

Bertolus J. 1988. L’art de truquer un bilan, Science &Vie Economie, No.40

Breton, G. and Taffler, R.J.: 1995 ‘Creative accounting and investment analystresponse’,

Accounting and Business Research, Vol. 25, No. 98, pp. 81- 92

Brown R., Steele T. 1999, The economics of accounting for growth”, Accounting and

business research, vol. 29, no 2

Burlacu, Gh., Pătroi, D., 2005. Criminalitatea economico-financiară între naţional şi

transfrontalier, Editura Paralela 45, Piteşti

Collingwood, H.: 1991 'Why K - Mart's good news isn't', Rusiness Week, March, 18, p.40.

Copeland, R.M.: 1968 ‘Income smoothing’, Journal of Accounting Research, VVI,

Supplement, pp.101 - 116.

Dharan, B. and Lev, B.: 1993 'The valuation consequence of accounting charges: a multi -

year examination', Journal of Accounting Auditing and Finance, 8 (4), pp 475-94.

Ezeani, N. S. (2010). Impact of Audit Report on the job performance of Accountants in

the public Sector 10 – 13. Unpublished

21

Feleagă, N, 2007, „Mizele puterii între cei care conduc întreprindereaşi cei care of

inanţează: baze teoretice, cadru conceptual şi modele referitoare la guvernanţa

corporativă”, Contabilitatea, Expertiza şi auditul afacerilor nr. 12, page. 14

Fox, J.: 1997 'Learn to play the Earnings Game', Fortune, 31 July.

Gounin L. - 1991, “L’art de presenter un bilan”, La Tribune.

Griffiths, I., 1986. Creative accounting, Sidgwick & Jackson, pp. 1

Healy, P.M.: 1985 ‘The effect of bonus schemes on accounting decisions’, Journal of

Accounting and Economics, 7, pp. 85- 107.

Healy, P.M. and Wahlen, J.M.: 1999 ‘A review of the creative accounting literature and

its implications for standard setting’, Accounting Horizons, Vol. 13, No. 4, pp. 365- 83.

Hepworth, S.R.: 1953 ‘Smoothing periodic income’, The Accounting Review, January: pp.

32- 39.

Hermann, D. and Inoue, T.: 1996 ‘Income smoothing and incentives by operating

condition: an empirical test using depreciation changes in Japan’, Journal of

International Accounting Auditing and Taxation, Vol. 5, Issue 2, pp.161- 78.

Jameson, M. (1988). A practical guide to creative accounting, Kogan Page

Kamin, J.Y. and Ronen, J.: 1978 ‘The smoothing of income numbers: some empirical

evidence on systematic differences among management- controlled and owner controlled

firms’, Accounting, Organizations and Society, Vol. 3, No. 2, pp.141- 57.

Ledouble D., 1993, „La creativite en comptabilite”,Semaine juridique (JCP), no 224, Ed.

E Droit Comptable

Lignon M.,1989, „L’art de calculer ses beneficies “. L’entreprise, no 50.

22

MacBarnet, D. and C. Whelan (1997). Regulatory Arbitrage through Financial

Innovation, Accounting, Auditing & Accountability Journal 10.1:85–104

Merchant, K.A. and Rockness, J.: 1994 ‘The ethics of managing earnings: anempirical

investigation’, Journal of Accounting and Public Policy, 13, pp.79- 94.

Naser, K., 1993. Creative financial accounting: itsnature and use, Hemel Hempstead:

Prentice Hall

Niskanen, J. and Keloharju, M.: 2000 ‘Earning cosmetics in a tax - driven accounting

environment: evidence from Finnish public firms’, The European Accounting Review,

Vol. 9:3, pp. 443- 452.

Osisisoma, B. C. and Enahoro, J. A. (2006). Creative Accounting and Option of Total

Quality Accounting in Nigeria. Journal of Global Accounting, 2(1) 5-15.

Raybaud- Turillo B., Teller R., 1996.”Comptabilite creative”, Economica, Paris,

Schipper, K.: 1989 ‘Commentary on creative accounting’, Accounting Horizons,

December, pp. 91- 102.

Shabou R, Boulila Taktak N., 2002. „Les déterminants de la comptabilité créative: étude

empirique dans le contexte des entreprises tunisiennes “, „Comptabilité – Contrôle –

Audit, vol 1.

Shah, Atul, K., 1996. Creative Compliance in Financial Reporting, Accounting,

Organizations and Society 21.1. pp. 23–39.

Smith, T., 1992. Accounting for growth, London: Century Business

Stolowy H., Breton G.(2003), Accounts Manipulation: A Literature Review and

Proposed Conceptual Framework”

23

Trotman, M., 1993. Comptabilite britanique, mod d’emploi, Economica, Paris

Trueman, B. and Titman, S.: 1988 ‘An explanation for accounting income smoothing’,

Journal of Accounting Research, Vol. 26, Supplement, pp.127- 139.

Watts, R.L., and Zimmerman, J.L., 1986. Positive Accounting Theory. Prentice-Hall,

Englewood cliffs.

Watts, R.L., Zimmerman J.L., 1986. Positive Accounting Theory, Prentice Hall

international Inc

Watts, R.L., Zimmerman J.L., 1990. Positive Accounting Theory: A ten year perspective,

Accounting Review, 65, pp.131-156

24