Creative Accounting and Ethics
Title: Creative Accounting & Ethics: Arguments For and Against Creative Accounting
Introduction
The accounting process consists of dealing with many matters which includes judgment and resolving conflicts between challenging approaches to the presentation of the results of financial transactions. This flexibility provides opportunities for manipulation, deceit and misrepresentation and is widely known as creative accounting (Harris n.d.). Creative accounting can be defined as a process which involves the accountants to exercise their knowledge of accounting rules to manipulate the figures reported in the accounts of a business. Other terms used may include income smoothing, earnings management, earning smoothing, financial engineering and cosmetic accounting (Boškin 2005).
The ways that companies usually manipulate their accounts include recording revenues too soon, recording bogus revenues, boosting income with one time gains, shifting expenses and income forward and backward, failure to disclose liabilities and changing estimates such as bad debts, litigation costs, capital asset lives, and pension assumptions (Schilit, cited in Davin n.d.).
While opinions on the acceptability of accounting manipulation vary, it is often perceived as reprehensible (Gowthorpe & Amat 2004). Hence, knowing when to do the right thing is both a question of ethics and professional responsibility.
Motivations for Creative Accounting
An important factor in accounting regulation is the sheer scale of the economic impact of accounting rules. The choice of an accounting rule may have a very significant impact on, for example, reported profits. The level of profitability of a commercial entity potentially affects distributions to owners, wage and salary negotiations, levels of pensions funding, ability to borrow or to raise further risk capital, taxes paid and so on. Regulators may attempt to take the economic consequences of their actions into account, but they are likely to be
Introduction
The accounting process consists of dealing with many matters which includes judgment and resolving conflicts between challenging approaches to the presentation of the results of financial transactions. This flexibility provides opportunities for manipulation, deceit and misrepresentation and is widely known as creative accounting (Harris n.d.). Creative accounting can be defined as a process which involves the accountants to exercise their knowledge of accounting rules to manipulate the figures reported in the accounts of a business. Other terms used may include income smoothing, earnings management, earning smoothing, financial engineering and cosmetic accounting (Boškin 2005).
The ways that companies usually manipulate their accounts include recording revenues too soon, recording bogus revenues, boosting income with one time gains, shifting expenses and income forward and backward, failure to disclose liabilities and changing estimates such as bad debts, litigation costs, capital asset lives, and pension assumptions (Schilit, cited in Davin n.d.).
While opinions on the acceptability of accounting manipulation vary, it is often perceived as reprehensible (Gowthorpe & Amat 2004). Hence, knowing when to do the right thing is both a question of ethics and professional responsibility.
Motivations for Creative Accounting
An important factor in accounting regulation is the sheer scale of the economic impact of accounting rules. The choice of an accounting rule may have a very significant impact on, for example, reported profits. The level of profitability of a commercial entity potentially affects distributions to owners, wage and salary negotiations, levels of pensions funding, ability to borrow or to raise further risk capital, taxes paid and so on. Regulators may attempt to take the economic consequences of their actions into account, but they are likely to be
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