A
PROJECT REPORT
ON
“ CAMOUFLAGE ACCOUNTING – MAPPING CREATIVE ACCOUNTING INTO
ACCOUNTING FRAUDS”
BY
KISHORE AGARWAL
B.COM. (FINANCE) DEPARTMENT
ROLL NO. 456
ACKNOWLEDGEMENTSA
CKNOWLEDG
CERTIFI take this opportunity to express my deep sense of gratitude to all those who have
contributed significantly by sharing their knowledge and experience in the completion of this
project work. I am greatly obliged to, for providing me with the right kind of opportunity and
facilities to complete this venture.
I am highly thankful to Dr. P.P. Ghosh – my internal faculty guide under whose
able guidance this project work was carried out. I thank him for his continuous support and
mentoring during the tenure of the project. I also thank my college authorities and specially
my Vice Principal Fr. Dominic Savio for giving me the opportunity to work on this
project and for there constant support and encouragement. I would also like to thank my dear
friend Vinay Sharma for his cooperation, advice and encouragement during the long and
arduous task of carrying out the project and preparing this report.
I also extend my acknowledgement to my beloved Parents and all my Friends for
their continuous encouragement at every moment. Last but not the least; I thank each and
every individual who has rendered his/her assistance in the successful completion of this
project.
Introduction
Creative accounting is also known as earning management and referring to accounting
practices that follows the letter of rules of standard accounting practices but certainly deviate
from the spirit of those rules. Creative accounting practices are different from fraudulent
practices and thus are not illegal but immoral in terms of misguiding investors. The practices,
which are followed in manipulating the books, are duly authorized by accounting system and
thus can not be considered as violation of any rule or regulations. It is characterized by
excessive compliance and the use of novel ways of characterizing income, assets, or
liabilities and the intent to influence readers towards the interpretations of desired results.
Earning Management or Creative accounting is result of judgments which is used by
managers in financial reporting and in maintaining books to manipulate reports for either
misleading investors or stakeholders or to influence economy to give positive response
towards financial performance of the company. The usual practice followed under earning
management is to increase or decrease earnings artificially through choices available in
accounting system.
Creative accounting is root cause of number of accounting scandals and many proposals for
accounting reform are focusing on removing such practices. Financial statement is the result
of the financial accounting process that accumulates, analyzes records, classifies,
summarizes, verifies, reports, and interprets the financial data of a business firm, which
reflect the financial position, performance and change in financial position of an enterprise
(Elliott, 2005).
However, in recent years, creative accounting is becoming increasing popular running
through companies, which lead to considerable allegation about the practice of creative
accounting. Companies are able to manipulate the financial statements through various types
of creative accounting techniques. It attracts more and more attention in the whole financial
market and its presence distorts the true and fair view of the financial position of companies,
and may cause serious corporate failure.
What is Creative Accounting?
Creative Accounting is by definition “creative” and therefore it could be described as “art” or
having artistic qualities. It is therefore loose in form and comes in different variants
The commentators and analysts‟ argument is that accountants start with a predetermined
profit figure and they try to find sales and costs that can achieve this predetermined profit.
Basically what they will be refering to is a technique that is called creative accounting.
The above point has been put more colourfully by some observers who argue that the
preparation of the financial statements such as the profit and loss account starts from the
required earnings per share (EPS) figure and accountants then work backwards to produce
that predetermined EPS.
Creative accounting gives financial statements an appearance that does not fully reflect the
true and fair view of the business‟ financial performance, financial position, and financial
adaptability. In other words creative accounting deliberately misleads the users of financial
information from annual accounting reports.
Most publicly listed companies are accused by commentators and financial analysts of
practising creative accounting, but none of these companies admit that they use it. However,
creative accounting was practised at companies that were involved in financial collapses such
as Enron, WorldCom, and Parmalaat.
The fact that these companies used creative accounting only became known because these
companies had become insolvent or bankrupt and proceedings were going through the legal
system. It can be argued that creative accounting is normally exposed if something in a
company has gone wrong such as if the business is facing bankruptcy.
Why is Creative Accounting Done?
If such high profile companies engaged in creative accounting then the question that should
be asked is why do companies or accountants use creative accounting? Some of the reasons
why creative accounting is used are as follows:
Creative accounting is used to overstate profits so that a business can appear to be more
profitable than it actually is. Businesses can inflate profits by deliberately excluding expenses
or understating expenses, overstating their revenues, or treating certain expenses as assets.To
preserve or to create an impression to the users of accounting information or the outside
world that they are a solvent business with a remote probability of financial distress.To
achieve market expectations or budgetary targets. Usually failure to meet market expectations
or budgetary targets is usually followed by a decline or collapse of the share price of the
reporting entity. Companies then use creative accounting to avoid market anger being meted
out to them.Some managers use creative accounting to ensure they meet targets that will
allow them to receive performance bonuses. Managers may use window dressing such as to
report more sales than they actually achieved or they can capitalise expenses to increase or
meet profit and efficiency targets. Managers can also use creative accounting to conceal
under-performing operations from users of accounting information.Businesses also use
creative accounting to mislead their bank managers and lenders so that they are able obtain
loans. Enron used creative accounting to mislead the markets about the company‟s poor
financial state and proximity to bankruptcy to maintain the value of the share price and to
maintain its relationship with financial stakeholders such as lenders, bankers, capital
providers, and counter parties. Businesses involved in raising equity can also use creative
accounting to underpin the share issue by inflating the financial performance.
9 Signs of Potential Creative Accounting Practices
Here are nine things investors should watch for as possible warnings of accounting
gimmickry:
1. Overly Aggressive Performance Targets: The company ups the ante by continually
setting revenue and earnings growth targets that are far ahead of its competitors'.
2. Overly Aggressive Management: The company's corporate leaders are known to be hard-
driving types who have a flair for self-promotion.
3. Big Upward Change in Accounts Receivable: This could be a sign a company is trying
to pad revenue; look for more explanation.
4. Big Downward Change in Reserve Account: It could be the product of overly optimistic
assumptions about things like collection of unpaid debts.
5. Big Upward Change in Inventory Account: A favorite accounting gimmick is to
overvalue inventory or create nonexistent inventory.
6. Changes in Accounting Policies: Companies should provide detailed explanations for any
changes in accounting treatments.
7. Frequent One-Time Charges: These could be a sign the company is trying to disguise
some recurring charges as nonrecurring items.
8. Frequent Related-Party Transactions: These could be a sign of potential conflicts of
interest if they involve loans or other transactions with corporate officers.
9. Premature Revenue Recognition: Booking sales before goods are actually sold, or by
immediately booking all the proceeds of a long-term contract.
WINDOW DRESSING
Window dressing is presenting company accounts in a manner which enhances the financial
position of the company. It is a form of creative accounting involving the manipulation of
figures to flatter the financial position of the business.
It is also defined as: „A form of accounting, which while complying with all the regulations,
nevertheless, gives a biased impression of the company‟s performance.‟
Though it is not illegal, it is considered by many financial pundits as unethical.
Reasons for Window Dressing:
Enhance Liquidity position of the Co. – hiding a deteriorating liquidity position,
and
Showcase stable Profitability of a company – massaging profit figures with
methods such as income smoothing or profit smoothing
Reduce Liability for Taxation
Ward-off takeover bids
Encourage Investors
Re-assure Lenders of Finance
To influence share price
Hide poor management decisions
Satisfy the demand of major investors concerning the desired level of return
Achieve the sales or profit target, thereby ensuring that management bonuses
are paid
Methods used for Window Dressing :
It redistributes income statement credits and charges among
different time periods. The prime objective is to moderate income variability over the
years by shifting income from good years to bad years. An example is reducing
a Discretionary Cost (e.g., advertising expense, research and development expense) in the
current year to improve current period earnings. In the next year, the discretionary cost
will be increased.
– E.g. Computer
software with
useful life of 3 years. As revenue expenditure it is treated as negative item on P&L
account. As capitalizing expenditure, it is treated as an asset in balance sheet, with yearly
depreciation in the P&L.
- Increasing expected life of asset reduces
depreciation provision in P&L account, hence, increasing net profits. Also, net book value in
balance
sheet will be higher for a longer period, thereby, increasing firm‟s asset value.
- Change in method of stock valuation policy
(LIFO,
FIFO or AVCO) can lead to increase in value of closing stock, boosting up the profits.
For example, in a rising price scenario, usage of FIFO method helps in increasing closing
stock inventory valuation, thereby reducing the COGS, and hence inflating the earnings.
Similarly, in a falling price scenario, LIFO valuation method for inventory is more
favourable.
– This involves selling fixed assets to a third party and then
paying
a sum of money per year to lease it back. Thus, the business retains the use of the asset
but no longer owns it.
-Balance Sheet Financing – Conversion of capital lease to operating lease so
that the
asset no longer features in the assets or liabilities of the balance sheet which
automatically improves ratios such as Total Asset Turnover Ratio (TATO), Return on
Assets, Equity Multiplier, etc. The costs saved are the interest expense on debt availed to
finance the capital lease and depreciation. Also, the debt-raising capacity of the company
increases as the liabilities component tones down. Naturally, earnings are inflated under
this method.
In the later years of use of asset, the company may revert back to capital lease financing
since the with net block having reduced considerably, the deprecation by WDV method
will also be very less, thereby providing an opportunity to inflate earnings. Also, it
provides the addition benefit of saving on tax.
- If intangible assets like goodwill are not depreciated
the
firm can maintain value of its assets giving a misleading view.
– Sales show up in the P&L account when the order is
received
and not at the point of transfer of ownership rights as mentioned in the notes to accounts
of the Co. under the heading of „Revenue Realisation‟.Encouraging customers to place
orders earlier than planned increases the sales revenue figure in P&L account. This brings
sales forward from next year to this year.
- Extraordinary items are revenues or costs that occur, but not as
a
result of normal business activity. These events are unusual and unlikely to be repeated
They should be highlighted in accounts, and inserted after the calculation of Profit before
Interest and Taxation. To include these in normal revenues will again exaggerate business
profits.
Examples of window dressing in Indian Companies :
1. Tata Motors transferred 24% stake in Tata Automotive Components (TACO), a company
with revenue of $675 in FY07, to Tata Capital, a group company, and booked a profit of
Rs 110 crore in Q1 FY09. Management declined to disclose the valuation methodology.
Tata Motors also changed its methodology for calculating provisions for doubtful
receivables, which resulted in higher reported Ebitda to the extent of Rs 50.7 crore (10%
of Ebitda).
2. TCS, the software major, increased its depreciation policy on computers from two years
to four years. As a result, Q1 FY09 PBT was higher by an estimated Rs 50 crore (4% of
net profit in 1QFY09). TCS followed cash-flow hedge accounting and till FY08, it used
to recognise hedging gains on effective hedges in its revenue line, thus boosting the
reported revenue growth and Ebit margin. In FY08, TCS had Rs 421crore from hedging
gains, of which, Rs 137 crore was included in the revenue line. However, from Q1 FY09,
TCS is expected to report all forex losses/gains below the Ebit line in other income. Thus,
the losses it had on its hedge position will no longer be booked in the operating line.
3. Jet Airways, changed its depreciation policy from WDV to SLM, and thereby wrote back
Rs 920 crore into its P&L, which helped the company to report profits during the quarter.
It also helped Jet to report a higher net worth, which will help in keeping reported gearing
low..
4. Dr Reddy’s adjusted mark to market losses (Q1 FY08) on outstanding $250 million of
hedges in the balance sheet, while P&L reflects forex gains realised.
5. Reliance Communications adjusted short-term quarterly fluctuations in foreign
exchange rates related to liabilities and borrowings to the carrying cost of fixed assets.
The company adjusted Rs 109 crore of realised and Rs 955 crore of unrealised forex
losses in the above manner. In addition, the company has not recognised Rs 399 crore of
translation losses on FCCBs, since the FCCBs can potentially get converted, although the
FCCBs are out of money. Adjusted for all the above, the company would have virtually
no profits in Q1 FY09.
EXAMPLES OF CREATIVE ACCOUNTING
EXAMPLE 1
Off- balance sheet financing
- balance sheet financing does not reveal certain financial information. It is effective
because off- balance sheet financing is not likely to be detected by independent users of
company accounts. It is not a new practice but it has grown rapidly in recent years.
• This could be done via a partial subsidiary which the company controls. For example
assets could be sold to this subsidiary. This produces a profit in the balance sheet, but
nothing has changed. It is simple a shuffling of debt/credit between companies
producing no overall increase in health or profitability.
• In using this method, companies are able to show better debt ratio, borrow more money
and still maintain the appropriate debt ratio required by lenders and put on a good ‟face‟
for investors. However, as off- balance sheet financing is a short term solution to a long
term problem, inevitability the loan still has to be repaid and the company still has to
obtain enough fund to pay off the „hidden‟ loan ( in the subsidiary ) to the ultimate lender,
which in most cases, is outside the group.
EXAMPLE 2
Revenue Recognition
particularly for companies whose earnings are „lumpy” spreading over two or more
accounting periods. For example, leasing firms may front load rental payments by
charging installation fees or claiming up-front part of the eventual residual value of the
asset leased.
recognizing a sale prior to the completion of that sale, before the product is delivered to
the customer or at a time when the customer still has the option to terminate the deal
resulting is a lower revenue being observed.
EXAMPLE 3
Smoothing Expenses
inventory, paid directly from reserves or more
blatantly under-provided. Capitalisation of interest can be justified by deciding that the
cost of borrowing money is part of the overall cost of an asset. Though interest is
normally taken from profits, many companies argue that the interest charge is a cost of
capital. Consequently, the interest charges which are not included in the statement of
financial performance, resurfaces as an increase to the fix assets in the statement of
financial position.
expensing adjustments which may involve a capitalization option are:-
– the latter element may be capitalized
that work-in-progress and finished goods include a proportion of
overheads and developmental cost.
acquisition which involve restructuring and rationalisation.
EXAMPLE 4
Improper accounting
mproper accounting for expenses as long –term investments making the company looks
more profitable. The executives may take ordinary operating expenses, such as wages
paid to workers for maintaining telecom systems, and treat them as capital expense
accounts. This allows the firm to spread their expenses out over several years rather
than accounting for them all at once.
-term investments
are spread out and subtracted from earnings over the life of the asset whereas operating
expenses are deducted from earnings immediately. In doing this the company artificially
lowered their expenses and may increase their profits. Therefore the value of the firm is
also artificially inflated.
WHAT ARE THE MOTIVES TO DO CREATIVE ACCOUNTING?
The motivation to use Creative Accounting
Various research studies have examined the issue of managerial motivation to use creative
accounting. The following have been identified as significant factors:
1. Tax avoidance
especially when taxable income is measured through accounting numbers. If
income can be understated or expenses overstated, then it may be possible to
avoid tax.
2. Increasing shareholders confidence
period. Ideally, this would show a steady upward trajectory without nasty
surprise for these shareholders, and so would help to avoid volatility in share
price, and would make it easier to raise further capital via share issues.
3. To meet internal targets.
management with respect to sales, profitability and share prices.
4. Meet external expectations.
and customers want long term survival of the company for their interests.
Suppliers want assurance about the payment and long term relationships with
the company. Company also wants to meat analyst‟s forecasts and dividend
payout pattern.
5. Provide income smoothing.
keep the share prices stable. Advocates of this approach favor it on account of
measure against the 'short-termism' of evaluating an investment on the basis of
the immediate yields. It also avoids raising expectations too high to be met by
the management.
6. Personal gain
uses are linked to profitability, there is a clear motivation
for manager to ensure that profit hit the necessary threshold to trigger a bonus
payment.
7. Following the pack
ve
accounting practices, they may feel obliged to do the same.
Besides, various opinions about the motivation to use creative accounting for example from
Healy and Whalen [1999] summarize the major motivations to manage earnings
which include
Public offerings, Regulation, Executive compensation, and financial liabilities. Schipper
[1989]
provides a conceptual framework for analyzing earnings management from an informational
perspective.
Beneish [2001] added insider trading in this list of motives. Managers aware of
misstatement of profits can benefit by trading the securities. Stolowy and Breton
[2000] suggest three broad objectives for earnings management: minimization of
political costs; minimization of the cost of
capital and maximization of managers‟ wealth. Deangelo [1988] refers to earnings
management
in buyout cases.
Teoh, Welch and Wong [1998] find that firms manage earnings prior to seasoned
equity offers and IPO‟s.Burgstahler and Eames [1998] conclude that firms manage
earnings to meet financial analysts‟ forecasts.
The Pros and Cons of IFRS
India was supposed to implement International Financial Reporting Standards, or IFRS, by
April 2011. It has deferred this indefinitely, and insisted on many modifications to the
standards - accounting boffins call them 'carve-outs' - as they relate to areas such as
agriculture, real estate, financial instruments and goodwill. It makes sense to adapt IFRS to
the realities of a particular country, but a large number of carveouts defeats the purpose of
global standards.
An example of necessary tweaking is China's decision to modify the IFRS on 'related party
transactions' to reflect state ownership of many companies on the mainland. The 'related
party' clause will not necessarily apply to Chinese companies. But in India's case, the
European Commission, an executive body of the European Union, has warned that the
country risks "creating a country-specific version of the IFRS that differs from those used
worldwide".
Among those who defend India's right to choose its own accounting standards is N.
Venkatram, Partner at Deloitte Haskins & Sells, a global consulting firm. "Every government
has a responsibility towards its own economy," he says. He cites the example of India's
conservative standards for banking, saying they ensured the sector was rock-steady when the
global downturn traumatised the industry worldwide.
Dolphy D'Souza, Partner, Ernst & Young India, has a different view. "The initial
modification may be a starting point, but ultimately, the market reality will bind India to
adopt IFRS in totality," he says. Many accountants and analysts agree that the main concern
that global standards seek to address is clarity in accounting, so that companies do not take
investors for a ride. Where there is scope for differing interpretations, they say, the standards
tend to be principle-based. IFRS may not be able to put a definitive end to accounting
jugglery and auditors' qualifications. However, D'Souza says: "Given that many countries
have already adopted IFRS, ambiguity and the scope for multiple interpretations are
substantially reduced."
GLOBAL IMPLICATIONS OF CREATIVE ACCOUNTING
In an age when Indian corporations run global companies, accounting practices should be
conservative rather than aggressive when there is an element of uncertainty. Bharti Airtel,
Infosys and Wipro are among the few Indian companies which voluntarily follow global
financial reporting standards.
"Nothing stops Indian companies from adopting IFRS on their consolidated accounts," says
D'Souza of E&Y. The Securities and Exchange Board of India, or SEBI, allows listed
companies with subsidiaries to publish consolidated financial results in accordance with
IFRS. But apart from information technology companies, few others do so. "IFRS is more
relevant to companies which have international operations, or who wish to raise capital
overseas," says Venkatram of Deloitte. There is no dearth of such companies in India.
A bad accounting policy can devastate a company, as the cases of Enron, WorldCom, Tyco
International and AIG have shown. Regulators are becoming more proactive. For example,
SEBI quietly did investors a favour last month by making it mandatory for listed companies
to announce fourth quarter results along with audited annual results. Some companies had
been conveniently filing only annual results, and not fourth quarter results - an unhealthy
practice that makes it harder for investors to gauge quarter-to-quarter performance.
Accounting standards are like signs on a long highway - the driver has to make the right
judgment.
Venkatram argues for maturity in disclosure standards. "We need better enforcement," he
says. Independent directors, market regulators and other stakeholders - especially domestic
and foreign institutional investors - need to be vigilant and challenge promoters if they stray
from the road. Satyam Computers became India's first information technology company to
adopt IFRS, way back in 2008. History has shown that it was not enough
Case Satyam Accounting Scandal
The Satyam Computer Services scandal was publicly announced on 7 January 2009 when
Chairman Ramalinga Raju confessed that Satyam s accounts had been falsified
Details
On 7 January 2009 company Chairman Ramalinga Raju resigned after notifying board
members and the Securities and Exchange Board of India SEBI that Satyam s accounts had
been falsified 1 2 3 Raju confessed that Satyam s balance sheet of 30 September 2008
contained inflated figures for cash and bank balances of 5 040 crore US 1 09 billion as
against 5 361 crore US 1 16 billion crore reflected in the books an accrued interest of 376
crore US 81 59 million which was non existent an understated liability of 1 230 crore US 266
91 million on account of funds was arranged by himself an overstated debtors position of 490
crore US 106 33 million as against 2 651 crore US 575 27 million in the books
Aftermaths
On 11 January 2009 the government nominated noted banker Deepak Parekh former
NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam s board
Merrill Lynch now a part of Bank of America and State Farm Insurance terminated its
engagement with the company Satyam s shares fell to 11 50 rupees on 10 January 2009 their
lowest level since March 1998 compared to a high of 544 rupees in 2008 Chartered
accountants regulator ICAI issued show cause notice to Satyam s auditor
PricewaterhouseCoopers PwC on the accounts fudging The Crime Investigation Department
CID team picked up Vadlamani Srinivas Satyam s then CFO for questioning
On 22 January 2009 CID told in court that the actual number of employees is only 40 000 and
not 53 000 as reported earlier and that Mr Raju had been allegedly withdrawing INR 20 crore
rupees every month for paying these 13 000 non existent employees
Root Cause
Prof Sapovadia in his study shows that in spite of there being a strong corporate governance
framework and strong legislation in India top management sometimes violates governance
norms either to favour family members or because of jealousy among siblings He finds that
there is a lack of regulatory supervision and inefficiency in prosecuting violators He
investigates in detail the recent governance failure at India s 4th largest IT firm Satyam
Computers Services Limited and considers possible reasons underlying such large failures of
oversight
PricewaterhouseCoopers Reply
On 14 January 2009 Price Waterhouse the Indian division of PricewaterhouseCoopers
announced that its reliance on potentially false information provided by the management of
Satyam may have rendered its audit reports inaccurate and unreliable 19
Advantages of Creative Accounting
Several advantages can be obtained by creative accounting, but with increased liabilities and
risk. According to Mulford (2002), some identified advantages of creative accounting are as
follows:
a. Higher reported earnings, and the higher assets, lower liabilities, and higher shareholders‟
equity amounts that accompany higher earnings, can convey an impression of improved
credit
quality and a higher debt rating to a lender or bond investor.
As a result, the use of creative accounting practices to improve reported financial measures
may lead to lower corporate borrowing costs. Steps taken to boost revenue will increase
earnings, current assets, and shareholders‟ equity and, in some instances, reduce liabilities
temporarily. Some companies also give bonus payouts to certain key officers if net income
exceeds a specific goal, whereas no bonus will be paid if net income falls below that amount.
Clearly, executives are motivated by the thought of bonus payouts, thus creative accounting
is
sometimes used to allow management to enjoy a bonus payout (Mulford, 2002). Another
example of creative accounting is the reporting of „less revenue‟ for companies such as, Oil
owners or Microsoft that carry the weight of what legal authorities consider a monopoly. By
reporting less revenue, it can create the appearance that the company is not doing so well in
hopes that it will temporarily take some of the eyes off of the company‟s financials by legal
entities. Many other advantages can be had through the use of creative accounting as well.
Disadvantages of Creative Accounting
As stated earlier, there are many benefits to be obtained through creative accounting, but
these
practices can lead to risks and liabilities (Mulford, 2002). Some identified disadvantages of
creative accounting are as follows:
a. Unforeseen errors in accounting calculations,
b. alteration of company image to customers and investors, and
c. adverse impact on creditors and employees – the employees typically face legal judgment
by lawsuits, the loss of money via no bonuses or lawsuits, and
d. the risk of being let go from their employer, as well as a critical gap in their resume to
explain to potential new employers.
CONSEQUENCES OF CREATIVE ACCOUNTING TO THE
COMPANY
1. Enron: accounting/off balance sheet contrivances. Chief financial officer indicted. The
company bankrupt with billions of equity value lost.
2. Tyco: chief executive officer charged with tax evasion, waste of corporate assets.
Massive charge of $6 billion to earnings after disposal of CIT unit.
3. WorldCom: $3.8 billion fraud. Loans to chief executive officer and became bankruptcy.
4. Adelphia Communications: off balance sheet loans to senior officers.
5. Xerox: accounting overstates profits by $1.4 billion.
6. Global Crossing: filed for bankruptcy after fiddling accounts.
7. Qwest Communications: chief executive officer resigned. Profits restated assets cut by
50%, or $34 billion. The share price down.
8. Health South: $1.4 billion fraud. Make false entries created in income statements and
balance sheets. $110 billion merger of AOL and TimeWarner cemented with inflated
accounting of AOL revenues. Within 18 months, company value declined 75%, and
massive write-downs of asset values were taken – AOL‟s 2002 earnings were written
down by $98.7 billion (a figure only slightly smaller than the European Union‟s budget for
2003); civil litigation ensued for damages to investors.
9. Bristol-Myers: restates $2.5 billion in sales and $900 million in profits after inflating
distributor‟s stock levels. They settles antitrust lawsuits for a cost of $670 million.
10.Vivendi-Universal in France: failure of strategy, loss to shareholders, and class action
suits filed alleging misrepresentation of company‟s financial realities.
11.HIH insurance group in Australia: failed with debts of $3.1 billion after consistently
understating claims liabilities. The chief executive officer, among other things, spent A$
340,000 on gold watches in 1 year. The criminal and civil charges pending against
several directors.
CONCLUSION
To sum up the discussion on creative accounting practices, it is an unfortunate situation that
we cannot completely restrict or stop the misuse or abuse of creative accounting practices.
The improper use of such creative accounting practices had fooled both auditors and
regulators in the past and it continues to do the same. The complex and diverse nature of the
business transactions and the latitude available in the accounting standards and policies make
it difficult to handle the issue of creative 101 accounting. It is not that creative accounting
solutions are always wrong. It is the intent and the magnitude of the disclosure which
determines its true nature and justification.
In the current economic climate, there is tremendous pressure--and personal incentive
for managers--to report sales growth and meet investors' revenue expectations. As a result,
more companies have issued misleading financial reports, according to the SEC, especially
involving game playing around earnings. But it's shareholders who suffer from aggressive
accounting strategies; they don't get a true sense of the financial health of the company, and
when problems come to light, the shares they're holding can plummet in value. How can
investors and their representatives on corporate boards spot trouble before it blows up in their
faces? According to the authors, they should keep their eyes peeled for common abuses in six
areas: revenue measurement and recognition, provisions and reserves for uncertain future
costs, asset valuation, derivatives, related party transactions, and information used for
benchmarking performance. This article examines the hazards of each accounting minefield,
using examples like Metallgesellschaft, Xerox, MicroStrategy, and Lernout & Hauspie. It
also provides a set of questions to ask to determine where a company's accounting practices
might be overly aggressive. These questions are the first line of defense against creative
accounting. The authors argue that members of corporate boards need to be financially
literate