Current Issues in Accounting: Examining Creative Accounting Methods Used by Origin Energy

This report examines the annual report of Origin energy to determine the creative accounting method that they have used in preparation of their financial statement which is done by financial preparers in section A, in section B it examines the opportunistic behaviors in the decision that is made by the managers and the reason for this opportunistic behavior.

Running head: CURRENT ISSUES IN ACCOUNTING 1
Current Issues in accounting
Student’s (Name)
Institution

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Executive summary
This report examines the annual report of Origin energy to determine the creative
accounting method that they have used in preparation of their financial statement which is done
by financial preparers in section A, in section B it examines the opportunistic behaviors in the
decision that is made by the managers and the reason for this opportunistic behavior.
There is continuous increase of accounting standards globally and in Australia (Billings,
2016), this standard is legally recognized and some have been passed by the legislature. There
are also several policies on the operation of the organization and how it should prepare its
financial statement, this policy has different view and element on the preparation of financial
statement hence a choice should be made in picking the best policy (Bhasin, 2016).
In making the choice of the best policies some financial preparers have opted to use some
‘creative ’mean of preparing financial statements so that they can deceive or provide a false
perception in their reports.
The report provides findings from various sources that are reliable and accurate mostly
obtained from the google and google scholar databases, some of the articles that re key in this
report are Australian Accounting standards, Origin energy company annual report 2017 and
Australian Professional code of conduct Standards.
This report will in generally indicate that Origin energy has engaged in creative
accounting for several reasons that will be drawn from three hypothesis s learnt during study, the
three areas that it will study in determining the creative accounting of Origin energy are choice
of accounting policy, biased prediction and disclosure for influencing predictions (Bhasin, 2015).

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Introduction
Accounting methods are a set of regulations and rules that are used by an organization
during the preparations of its financial statement which entails the manner it reports the
revenues, expense and any other relevant financial recording. Accounting methods can be
categorized into two accrual accounting methods and cash accounting method, the choice
between those accounting methods depend on the organization management and the laws that are
dictated by IRS.
There is need for choice between the available accounting policies and standards that is
best for the company or organization without engaging on illegal activities (Jones, 2011). The
choice between accounting policies will depend on the decision of accountants, shareholders and
management by the organization either during its foundation or as it continues to operate. In
some pubic institution the choice is dictated by the government.
Financial statement has engaged in creative accounting where the financial statements
and annual reports especially in finance provide false information with the aim of deception or
providing a false perception which could be due to various reasons. Henderson et al. provides
hypothesis for this reason.
The choice of the best accounting policy is always on managers and financial preparers
and as mentioned they might engage in certain opportunistic behaviors for their own benefit in
the expense of the shareholders and other stakeholders but this could be prevented using contract
as this paper will explain in the second part.
Most small organizations go for cash accounting method because it is simple and because
of how the statements are recorded, in this method expenses are considered in the year that they

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are paid unlike in accrual accounting method where the timing of revenues and expenses is
according to the year the contract is signed.
Once the choice of accounting policy is made it is very difficult for changes to be made
to another accounting method or policy unless authorized by IRS because changes in accounting
policy could affect the whole organization operation. This paper examines Origin Energy limited
in orders to identify creative accounting policy and its reasons while identifying the opportunistic
behaviors by mangers and their causes.
Origin Energy company is a public energy company which was founded in the year
2000.With its headquarters in Sydney it provides services such as electricity, solar panels,
naturals gas, electricity, cooling and heating and vehicle charging.
It has employed above 6000 employees in 2016 and it has had a difficult time regarding
losses with the largest one being on 2015 where they recorded a loss of $658million and a net
income of $12.174 million.
Accounting Policy Choice and Creative Accounting
Creative accounting is the occurrence of generation of statements from accounting
policies in producing a certain impression to the shareholders and the stakeholders (Khaneja &
Bhargava, 2017). This creative accounting methods produce unreliable and inaccurate financial
statement but has not yet been classified as being illegal. Accounting policy are regulations that
entails how a company prepares its financial statement. In Origin energy limited I will lock at the
three examples of accounting creativity which are: estimates or perdition of the future events,
disclosure of events and accounting policy choice.

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Creative Accounting Example No.1: Disclosure of transaction or events
Creative accounting can be seen when the organization confuses the focus of the people
from issues that really matter by use of material or any other focus. This method has been used
by the organization to confuse the shareholders and the stakeholders and the object that has been
used in changing this focus from issues like problems in the market is the company’s prosperity,
this company is among the best energy companies in the with a profit of $834 million, it also
spent $1billion to reduce its debts (Tassadaq & Malik, 2015).
The larger part of the report is on the performance and financial analysis focusing on the
success of the company neglecting other important issues such as the reduction in the need for
some petroleum projects as a result of increase in technology, there market has thus reduced and
an example can be seen in the reduction of the products that they supply in Chinese as the
country continues to embrace technology, despite all this they have not indicated this in their
annual report strategy as important as it since it could affect the company’s future.
Creative Accounting Example No.2: Estimates of future events.
Some shareholders and stakeholders make their decisions based on the predictions of
future operations and profits in the annual report of organizations sine it indicates the future of
the organization whether positive or negative, the annual report of Origin Energy indicates that
they are among the best companies in Australia making huge amounts of profits almost as their
rivals Energy Australia and AGL (Piper, 2016).
When observing the annual repot of the company however it can be seen that the
company has engaged in creative accounting particularly observing the effects of debt and
reduction in the market of their products in their organizations, it has been noted that there is an

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increase in the company’s debt since the year 2012 and the market of their products has
continued to decrease as an example indicates in the Chinese government even as the annual
report continues to indicate stability in the manner in which the company deals with debts, this
major issues that should be included in the report but have not yet been included thus showing
the creative accounting method to conceal this truth so that investors can see that they are
prospering to invest more yet there are issues that they need to deal with.
Creative Accounting Example No.3: Choice of accounting policy.
The choice of accounting policy should be relevant and reliable according to AASB 108,
this is a factor that every financial statement preparers needs to consider, there are situations
when financial preparers decide to be creative in that they may choose policies that are
manipulative an inaccurate in the manner it reports its financial statements the same situation is
seen in the case of Origin energy in the manner in which they present its financial disclosure
which is key in the influence of the shareholders and the stakeholders. Creative accounting is
seen in the neglection of the company to write down some liabilities in their financial statement
(Mulford & Comiskey, 2011), some of this liabilities that have been problematic to this company
are debts. The report indicates that the debts have been dealt with while this has been a problem
for the company since 2012. This creative accounting method provides the perception that the
company is doing well while in real sense there is increase in liabilities and
Motivation for use of the types of creative accounting mentioned
Commercial organizations are always focused on the maximization of profits (Ijeoma,
2015) with the improvement of share prices and dividends to the shareholders at the same time

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maintaining their salaries and status. This is the same case to all the creative accounting methods
by Origin Energy limited though every creative accounting behavior can be attached to a specific
reason. These reasons are discussed below based on Henderson et al. hypothesis.
Creative Accounting Example No.1: Disclosure of transaction or events
The main reason behind Origin energy failing to disclose some transactions or events
which are key in the future of the organization such as the debts and the market changes can be
attributed to contractual motivation where the statement preparers are concerned with their own
self-interest in considering the amount that they may lose, they therefore prefer generating
deceiving financial statements provided they are able to save themselves form problems that may
arise when the shareholders and the stakeholder. There are actions are selfish and based on their
own self-interest without considering other important people in the organization who might
suffer for their actions (Melo, Pereira & Souza, 2014).
Creative Accounting Example No.2: Estimates of future events.
The motivation behind Origin Energy failing to disclose some issues that could affect the
organization in future is in line with income smoothening theory even as they face issues such as
huge debts and increase in the technology in the society thus reducing the need for their energy
products, the statement preparers are against and they do not want they shareholders to see that
the challenges they are facing in their estimation of the future because if this people see they will
definitely lose their benefits ,another reason for creative accounting method can be attached to
capital market motivation in that they know that if they disclose this issues they will reduce their

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revenue obtained from the market and the investors and shareholders will also reduce their
investment in the company.
Creative Accounting Example No.3: Choice of accounting policy.
The motivation behind the using this deceiving policies by this organization which show
an increase in the company’s profit as it increases its assists and continues to deal with the
liabilities can be due to capital market motivation where in an effort to continue receiving the
benefits, salary and allowances that they get from the company they have to deceive the
shareholders and the stakeholders who might decide to withdraw their support for the
organization if they are made aware of the situation. These accountants are afraid that if they try
and disclose the problems that are facing the organization to the shareholders and the
stakeholders they may end withdrawing their support and funds form the organization thus
leading to reduction in their shares a situation which will result in decrease in the remuneration
and other benefits received by the financial preparers. (Bora & Saha, 2016).
Accounting Policy Choice and Opportunistic Behavior
As mentioned above the accounting policies continue to change and increase rampantly
which prompts for the need of decision making (Rajput, 2014). Opportunistic behavior are
scenarios where the decision-making choice by the mangers is motivated by meeting of their
self-interest without consideration of the effect of their decision on others like the shareholders
and other stakeholders including the fellow employees.

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Opportunistic behavior
In some of its branches origin energy has had mergers, there by maintaining the mangers
and some employees of those organizations, this has been a big challenge to the organization in
other cases resulting to demerges (Maltritz, & Wüste, 2015) because the managers who they
retain for this organization have elevated their self-interest over the interest of their own
company using the opportunity that they must increase their salaries every time there is an
increase in the profit. This behavior could be attached to inadequate policy on the increment of
the salary to the employees or poor performance by the board to limit the behavior of this
managers, there is need to deal with this problem since it may dominantly continue unless dealt
with.
They may use bonding to limit the manager in the merges or those planning to engage in
any other opportunistic behaviors example those that take a lot of the company money which
could include spending a lot of the money on purchasing expensive cars for commutation.
Another method that could be used to deal with this is a contract, it could clearly show how the
payments to the mangers should increase and in this case a portion of the managers salary could
be attached to the income of the manager so that if he wants more money as remuneration he also
must work harder in providing the company with greater profits.
Conclusion
In summary the increase in policies and standards may continue to be a problem to some
organizations especially if decisions regarding the choice of policies are not made correctly, this
continues to be a threat to companies since the statements preparers are also determined not to
lose their jobs at the same time meet the expectations of the shareholders and the stakeholders

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(Tassadaq, & Malik, 2015). Even in trying to cope with the pressure for the stakeholders and the
shareholders a balance should be found in their dealings so that they do not have to lie
concerning such issues to the extent of using relative accounting, these methods continue to
discourage the relationship between the management different key parts in an organization
resulting to agency problems (Momamani, 2013). This problem is likely to escalate even to
greater problems as the policies increase else a lot of companies will be dissolved if this method
of creative accounting can no longer be used to hide this problem
Looking at Origin Energy a public energy company, there is need to deal with this
practice of creative accounting and the best way that this could be done is by use of review of the
policies by the management and adjuring o a more favorable one, the financial preparers also
need to face the shareholders and the stake holders in truth regardless of their reaction to foster
transparency and trust among them. The problems that are facing this organization has been
attributed to greatly by the managers in the organization, there is therefore need of promoting
values in the organization in dealing with this hypothesis that influence boteh creative
accounting and opportunistic behaviors.

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