Creative Accounting

Particularly in this age of SOX, we require professional accountants to have curiosity and a healthy skepticism of the financial systems around them. They must be able to identify relevant facts, evaluate judgment and interpret intent; follow a clear, ethical and logical path when performing their work; and communicate their thoughts to peers and clients. No doubt, one must be competent in critical thinking to be effective in life, especially in a competitive business environment. Indeed, while critical thinking is necessary for accountants in today’s business world, cultivating students’ critical thinking skills in an accounting classroom can be a challenge.

• Knowledge and application of technology is increasingly essential in effective forensic accounting, anti-fraud programs, and fraud investigations .
• The changes may be genuine and necessary to reflect economic conditions and enhance fair presentation of some items of transactions or financial statements.
• Creative accounting and earnings management is a euphemism referring to the accounting practices that may follow the letter of the rules of standard accounting practices, but clearly deviated from the spirit of the regulation.
• Particularly in this age of SOX, we require professional accountants to have curiosity and a healthy skepticism of the financial systems around them.
• They usually will have become onerous due to changes in market conditions (e.g. changes in selling prices) or changes in operations (e.g. closing a leased shop, while not being able to assign the lease).
• In Cynthia Jeffrey (Eds.), Research on professional responsibility and ethics in accounting, vol.

Each interview included questions on the political economy of the IASB’s conceptual framework project, ambiguities in accounting as well as the impact of the rights and obligations approach on future standard setting. In total, 16 phone interviews and two face-to-face interviews were conducted.

Examples Of Creative Accounting

Utilising models from US value relevance literature, the evidence supported the proposition that restating firms were smaller and had higher growth opportunities than their industry competitors. Restatements were negatively related to future earnings changes and were often simply errors in the initial statements.

Onerous contracts will normally be for the long-term supply of goods or services. They usually will have become onerous due to changes in market conditions (e.g. changes in selling prices) or changes in operations (e.g. closing a leased shop, while not being able to assign the lease). If the contract can be cancelled without having to pay compensation, it is not onerous. With the concept of materiality, companies can categorize transactions are actually material becomes immaterial. Nike, Inc. famously employed offshoring by selling its Swoosh logo to a Bermuda-based special-purpose entity subsidiary for a nominal amount, and then went on to “charge itself” licensing fees that Nike Inc. had to pay to the subsidiary in order to use its own brand in Europe. The Dutch tax authorities were aware of and approved of this siphoning structure, but did not publish the private agreement they had with Nike. The licensing fees totaled $3.86Bn over the course of 3 years and were discovered due to an unrelated U.S.-based lawsuit as well as the Paradise Papers.

Provisions, Contingent Liabilities And Contingent Assets

The authors argue that regulators have forced “voluntary” disclosure from firms in order to promote competition, thereby safeguarding the public interest. Within the Smithian model, regulation aims to reassure the public in a time of crisis . The public are the shareholders and “owners” and have access to the governance of firms through corporate disclosure. Some companies like public utilities like electricity and social services are subject to regulations by government regulator who prescribes maximum amounts they can charge.

From the result of the data analysed and the results of the tests, it thus inferred that the internal audit function affects the level of creative accounting practices in MDAs. This observation mirrors similar conclusions on the centrality of internal audit as financial quality assurance and control mechanism, as well as being a major plank of the internal control framework. The implication of this is not far-fetched, as evidence shows that all MDAs have internal audit departments that vet all financial transactions in the public domain. By implication, no operation is concluded without audit input, thus signifying that an efficient internal audit unit would undoubtedly act as the first line of deterrence against financial misconduct. On his part, studied the impact of creative accounting techniques on the reliability of financial reporting from auditors and academics point of view. The study found out that innovative accounting techniques have positive and negative effects.

In March 2018, the International Accounting Standards Board published the revised version of its Conceptual Framework , which constitutes the principles-based guideline for the development and revision of International Financial Reporting Standards . However, the CF is at the heart of the IASB’s “revolution in financial reporting” (IASB, 2012, p. 4), which has striven for a more faithful representation of the “economic substance of the underlying economic phenomenon” (IASB, 2018b, para. 2.32) since 2001. As a cornerstone of this movement, the IASB refined two key elements of financial statements – assets and liabilities – in terms of rights and obligations. In doing so, the board removed ambiguities in the definitions of balance sheet items.

This paper adds to this literature as it traces the path towards the anchoring of the rights and obligations approach since 2001 and reveals how changes in the conceptual framework served as a political tool to legitimate accounting change at the standards level. The purpose of financial reports set out above is that financial reports are for users to obtain useful information to facilitate their economic decisions regarding the firm. If financial reports do contain creative accounting, on the face of it they are also designed by the managers to mislead users. Managers may have used methods and discretions available in the accounting standards to flatter the firm’s performance or financial position by applying favourable accounting choices, estimates or other accounting practices. Even where the departures from the accounting standards are fully disclosed, and the effects of the departure are contained in reports, suspicion by the user of further undisclosed departures from the accounting standards may diminish the value of financial statements . More recent research has built on measurement tools designed to test for creative accounting by articulating differences between the balance sheet and the income statement (Jones 1991; Subramanyam 1998). Using the SPSS tool to analyse the data collected via a structured questionnaire which observed that the internal audit function has a bearing on creative accounting practices in MDAs.

Accounting System

The period of time for which financial statements are produced see also financial year. Lita Epstein, MBA, designs online courses about reading financial reports, investing, and taxes. She’s the author of Reading Financial Reports For Dummies and also writes periodically for AOL’s Daily Finance.

A liability, on the other hand, was defined as “a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits” (ibid., para. 49b). The similarly vague definition of the term ‘liability’ provided corresponding room for interpretation. This resulted in both the capitalization of liabilities that did not meet the definition or non-capitalization of liabilities even though they met the extant definition, such as liabilities arising from operating leases (Hoogervorst, 2016, p. 2) or certain contingent liabilities . Against this backdrop, the IASB’s CF from 2018 includes changes in three elemental and interwoven building blocks, namely in the definitions of elements, unit of account and recognition. The IFRSs have gained broad acceptance and are now applied by listed companies in approximately 120 countries around the world. The Securities and Exchange Commission’s roadmap suggests that the decision over the future adoption of IFRS by U.S. companies should be made in due time. Thus, the world seems to be on the way to one single accounting language.

The volume is divided into four parts with 17 chapters in total, each of which consists of a single article. Five of these articles are co-authored with international colleagues from three different countries. The book starts off with five initial chapters that discuss international aspects of the development https://accountingcoaching.online/ of financial reporting practices over time (Part I, Chapters 1–5). Chapters 9–13 in Part III are concerned with the International Financial Reporting Standards. The last part of the book (Part IV, Chapters 14–17) moves to studies about the “true and fair view” requirement for financial reporting.

Accounting And Auditing Enforcement Release Aaer

In a reply to this comment , d’Arcy notes that the discrepancies could be explained by different interpretations. Chapter 8 shows that the classification of accounting systems still plays a role after the introduction of IFRS in Europe and in several other countries.

Unfortunately, as of 2020, it looks less and less likely that such a universal set of practices and standards will ever be carved out. The lack of consensus on exactly how corporate accounting should be completed makes it easier for dishonest people to get away with being dishonest.

• The 71 sample companies had a representation in each of the industry sectors, albeit information technology and telecommunications sectors were represented by only one company10.
• The predictive capability of the model was assessed through three company-specific case studies utilising content analysis of the firms’ financial reports to corroborate any potential presence of creative accounting.
• Ahadiat conducted a study in which he asked respondents to rate the skills expected of an accountant and the auditor.
• Due to the increasing significance of the unit of account at the conceptual and standards level, accountants have called for more precision “rather than leaving it to chance” (ibid.).
• But those little errors can add up when spread carefully across a firm’s financial reports.
• The following subsections outline adjustments to central building blocks in the revised CF, shed light on possible implications of these changes and demonstrate how they eventually translate in the accounting for leases.
• Evidence of the increasing influence of the profession in Australia during this period is illustrated in the Victorian Public Accountants Bill of 1899, which restricted the recognition of “qualified accountants” in the colony of Victoria to members of the registered professional bodies in Victoria .

Argued that information asymmetry has the potential to explain the numerous encouragements captured on the financial market to manipulate accounting number and further to assess the consequence of such behaviour. The study also noted that information asymmetry is an integral part of economic theory. Directors may choose to exploit their privileged position for private gains by managing financial reporting disclosure in their favour. The information perception assumes that accounting disclosures have information content that possesses value to stakeholders in providing useful signals. It may be difficult or impossible for distinct stakeholders to distinguish the fact and the effect of accounting manipulation, because of insufficient personal skill, indifference or an unwillingness to engage in detailed analysis.

Market Research

Measures of central tendency included the meanwhile a measure of variability consists of the standard deviation ; the minimum and maximum variables and data presented in forms of tables. Inferential statistics used was Pearson Correlation and Analysis of Variance to test the hypothesis to determine the nature and strength of the nexus between internal audit and creative accounting practices in MDAs in Nigeria. Explored the influence of creative accounting on firm value in Nigeria, and the findings of the article revealed that it could positively affect firms’ value. Similarly, undertook to investigate the opinions of experienced staff of commercial banks on creative accounting practices in Nigeria. Based on their study, they recommended that income smoothing should reflect as a severe crime and as such, accounting bodies, law courts and other regulatory authorities need to adopt strict measures to stop the practice.

• Nobes provides arguments that, in contrast to the hypotheses of Alexander and Archer , Anglo-Saxon accounting does exist due to similar conceptual approaches and—more importantly—due to similar accounting practices, especially when compared with other countries.
• One of the primary examples of income smoothing techniques is deferring revenue during a successful fiscal year in case the next business year is expected to be unfruitful.
• Accountants in leadership roles can use creativity to help their company or client in achieving specific results.
• Besides the formal certificate, one can deepen his knowledge and sharpen his skills in forensic accounting by undergoing training under experienced forensic accountant, participating in various international conferences, reading relevant journals, books and other literature on forensic accounting.
• Of examining the same 71 companies across seven years is the possibility the research can follow the use of creative accounting by specific companies over those years.
• This observation mirrors similar conclusions on the centrality of internal audit as financial quality assurance and control mechanism, as well as being a major plank of the internal control framework.

Non-adjusting events do not result in changes to amounts included in the financial statements. They will only be disclosed in the notes to the accounts if they are of sufficient materiality i.e. the non-disclosure could influence the economic decisions taken by users on the basis of the financial statements. The game the numbers in the income statement occurs at speeding up or slowing down the recognition of revenues and expenses. Many factors might cause companies use creative accounting to maintain the company’s existence middle of very intense competition today. Therefore we need creative ways in financial accounting in the business world, although it is often considered the less ethical.

The production of financial and non-financial information used in planning for the future; making decisions about products, services, prices and what costs to incur; and ensuring that plans are implemented and achieved. That the newly adopted accounting principle had previously been in use. May include plant, machinery and equipment, shares of another company etc.

In case of any noticeable inconsistencies in these records, the ink column was periodically brushed over in the books to make the records more illegible. Citing from this example, it is evident that the manipulative behavior of figures in the business landscape is not a new phenomenon and date back five centuries ago. Creative accounting is in essence not illegal and investors may sometimes even benefit from its application. However, creative accounting distorts reality, which may mislead users of financial statement information and is therefore generally considered unethical. Notably “Abnormal” and “Other” were not reliably reported in financial statements within the published financial accounts. Published Annual Reports A total of 497 published accounts were downloaded and hard copies printed for the sample companies across the seven years 11.

In the Discussion Paper, the IASB explicitly stated that “an asset is the underlying resource ” (IASB, 2013, p. 7) and the term ‘resource’ should be interpreted as either a right or another source of value (ibid., para. 2.11). Although the IASB listed possible ‘other sources of value’, e.g., know-how, customer lists, and goodwill (ibid., para. 3.5c), the terminology is ambiguous and provides room for wide interpretations. Facing the potential threat of renewed ambiguity, in 2014 the IASB tentatively decided that “ssets should be viewed as rights, or bundles of rights, rather than underlying physical or other objects” (IASB, 2014a, p. 3). This decision was adopted in the IASB’s Exposure Draft from 2015 as well as in the final CF from 2018, thereby excluding any alternative interpretation. Narrowing the range of alternatives to a single accounting model eventually removed the ambiguities from the previous asset and liability definitions (see also Figure 2 in Section 5.2). By explicitly anchoring the rights and obligations approach, “the framework was really catching up with the thinking that the board already had at that stage” (Interview #9, Technical Staff ). All in all, the definitions of assets and liabilities, unit of account and recognition represent three indiscerptible components of financial reporting.

The article used SPSS version 26 in analysing the data obtained via the questionnaire. The measures used to describe the data set are measures of central tendency and measures of variability or dispersion.

Accounting Rate Of Return Arr

We understand that papers that are submitted late have some points deducted. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it. If the average inventory item value is $350, and there are 10 categories of items, then, using such a creative inventory addition technique, the company can quickly increase the value of its total assets by $350,000. But then the CEO starts thinking, “If we print these numbers, as is, then our investors are going to expect to see over-the-top results all the time. Often, it’s not the case that they are inherently evil people who delight in deceiving the public. It’s more often the case that they simply give in to the enormous pressure they’re under, being paid outrageous sums of money and expected to direct their company to ever-increasing growth and profitability, amid an increasingly competitive business landscape.

It further shows that the revision of central building blocks does not fully remove but rather shift ambiguities to other arenas and, finally, discusses the implications of these changes at the standards level. While the pyramid on the left-hand side reflects the IASC’s concepts, the figure on the right-hand side highlights the conceptual changes made by the IASB’s revised CF. On the level ‘fundamental’, the elements of financial reporting – assets and liabilities – have been redefined in terms of rights and obligations and, in this way, reduced ambiguities that surrounded the previous 0-1 dichotomy. In addition, the IASB replaced the qualitative characteristic of reliability with the principle of faithful representation. Both qualitative characteristics operationalize the objective of financial reporting .

Events After Balance Sheet Date And Financial Commitments

Even though this point of view is correct, it would be more important for standard setters’ to intensify the careful definition and clear clarification qualities of the standard. It is impractical to completely seal all the loopholes being exploited by accounts to practice creative accounting. However, Creative Accounting: Definition, Methods and Prevention it would be practical to reduce at least the negative impact of creative accounting by strictly implementing the accounting standards, decreasing managers’ flexibility in deciding among different accounting methods, and giving more importance to ethical considerations of accounting practice.