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
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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.
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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).
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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
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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
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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
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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:
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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:
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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
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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
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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
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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.
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- 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
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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
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‘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.
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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.
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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
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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.
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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.
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