Creative Accounting
Abstract:
Creative accounting is a practice of accounting following the certain rules of it, but it is fluctuated from the basic spirit of those rules. Creative accounting is the ‘colorful’ representation of a company’s assets, liabilities and income. It is basically done to attract investors. The example of ‘the half glass of water’ maybe pulled to explain the idea. If a glass is filled with water to its half volume, then instead of saying ‘it is half empty’, the creative accountants prefer to say ‘it is half full’! Thus the information related to financial situation of a certain company is ‘colored’ by the creative accountants or auditors for building a better image of the company to the stakeholders. To be more precise, creative accounting is the ‘systematic misrepresentation’ of a firm’s true income and asset valuation. It is also the root of all accounting related scandals. The crash of US stock market in 2002 took place due to creative accounting is said by the journalists. One interesting fact about this procedure is, this system was actually first used in a movie named ‘The Producers’ by Mel Brooks in 1968.
The creative accounting concept is generally used when:
a) A company is about to float its shares in the stock market, to manipulate investor’s mind to pay premium per share.
b) A company’s shares are already in market, the firm wants to manipulate the share price by coloring its financial state through creative accounting to enjoy a short term BOOST in price.
c) A company wants to manipulate a certain class of stakeholders for the sake of the firm.
The management willing to use creative accounting finds loopholes in the financial reporting standards and allows the accountants to adjust numbers or figures to increase the income or profit and to decrease the liabilities. Although being in the risk of accusation of being a fraud, the managers prefer this creative accounting concept when the business of the firm is in a
Creative accounting is a practice of accounting following the certain rules of it, but it is fluctuated from the basic spirit of those rules. Creative accounting is the ‘colorful’ representation of a company’s assets, liabilities and income. It is basically done to attract investors. The example of ‘the half glass of water’ maybe pulled to explain the idea. If a glass is filled with water to its half volume, then instead of saying ‘it is half empty’, the creative accountants prefer to say ‘it is half full’! Thus the information related to financial situation of a certain company is ‘colored’ by the creative accountants or auditors for building a better image of the company to the stakeholders. To be more precise, creative accounting is the ‘systematic misrepresentation’ of a firm’s true income and asset valuation. It is also the root of all accounting related scandals. The crash of US stock market in 2002 took place due to creative accounting is said by the journalists. One interesting fact about this procedure is, this system was actually first used in a movie named ‘The Producers’ by Mel Brooks in 1968.
The creative accounting concept is generally used when:
a) A company is about to float its shares in the stock market, to manipulate investor’s mind to pay premium per share.
b) A company’s shares are already in market, the firm wants to manipulate the share price by coloring its financial state through creative accounting to enjoy a short term BOOST in price.
c) A company wants to manipulate a certain class of stakeholders for the sake of the firm.
The management willing to use creative accounting finds loopholes in the financial reporting standards and allows the accountants to adjust numbers or figures to increase the income or profit and to decrease the liabilities. Although being in the risk of accusation of being a fraud, the managers prefer this creative accounting concept when the business of the firm is in a