Assignment Creative Accounting
Added on - 18 Oct 2019
In this blog we understand the concept of creative e accounting and should you use it. With thehelp of this blog, you can understand how creative accounting use in the ethical and unethicalway in business. As the economic environment and competition in the business increasedrapidly, creative accounting plays its necessary role in this pace. The objective of this blog is tocover the concept of creative accounting and to understand the numerous techniques of creativeaccounting. The use of creative accounting in the management has become consists of thepractices of overestimation of assets, price of a share and so on. Creative accounting is unethicalbut not illegal since it does not achieve the major objective of the financial reporting that is topresent a true and fair picture of the business. The main aim of this writing is to show the use offinancial information in manipulated practices and whether the company should use this practicein the business. It highlights both the issues of whether to use creative accounting or not. Entitiesfollow the accounting standard procedures and also use the loopholes to enhance the company'sperformance in the market.What is Creative Accounting?The financial statement reflects the company’s position. Creative accounting indulged inmanipulation as the economic environment cause change and the increasing competition.Creative accounting termed as an imaginative way of financial accounts presentation. Thisaccounting is also known as aggressive accounting, window accounting, and innovativeaccounting. The concept of creative accounting is to provide financial information, one of theimportant information to the decision-makers and outsiders of the company. The main objectiveis to present a true and fair picture of the business to the stakeholders of the company. Investorsexpect reliable accounting information helps them incorrect decision making the unethicaltechnique for earning is also used by the company as the increasing competition in the marketand economic condition. Methods of manipulation of the financial statements included changesin financial statements and those who manipulate the date are the creative accountants and themanagers of the company. Creative accounting described the practices of inappropriateaccounting or entering into complex or special purpose transactions. Creative accountingmisrepresents the reality which may mislead the users of financial statements information. That’swhy usually this accounting considered as unethical, the deviation from the accounting laws andregulation. This does not mean that the violation of accounting standards undertaken in thecreative accounting policy. This is important to refer that creative accounting is unethical but notillegal since it does not achieve the major objective of the financial reporting that is to present atrue and fair picture of the business. This information of creative analysis contributes to theminimization of creative accounting impact. The basic ethical standards to implement in thebusiness, encourage the companies in its use.The motive of creative accounting is to show the financial health conclusively on the basis tofind out the loopholes in accounting standards and laws. The intention is to enhance thefinancial statement presentation in a positive impact. This accounting show positivity when it
applied positively. The certain thing is that creative accounting harms financial reporting.Creative accounting is complex in its design by using the words from the novel.Management is responsible for the manipulation of financial reporting. The instructions arefollowed by the creative accountant for financial reporting. The main objective is the applicationof creative accounting is:Management obtained personal profits by doing so.The changing competition in the marketTo attract the investors reflect the financial report in an effective mannerIncreasing and maintaining the capital level of an organization.Beating the analyst s estimation about the future performance of the company.The accounting done with the help of creative accounting is unethical, it does not provide a trueand fair view of the company. The aim of creative accounting attempts to show higherprofitability. This is the manipulation by accountants with the assets and liabilities of thecompany. Creative managers involve boosting their bonuses, the debt can be organized byconvincing lenders, to increase the sale s of the company. Avoid paying taxes resulted in lowerincome tax. This practice can be used to decrease the reported profitability in the financialstatements. Undesirable accounting deals with many judgment matters. These techniques for theaccounting parameter cause changes from the actual results.Creative accounting uses various accounting tools and different practices for manipulation. Thewide use of creative accounting techniques discussed below:To reduce the depreciation charge for the related period.The manipulation of off-balance-sheet financing itemsManipulation of income and expense statementCause changes in the present value of money.Recording the fictitious sales revenue to overestimate the revenuesManipulation of accrual basis of accounting and receivables write-offs.The current profits can be overestimated by avoiding the provisions for reserve doubtfuldebts and the legal obligation.The cost of goods sold(COGS) can be understated by the overvaluation of closing stockthereby that shows the profit has been increased which shows an increase in the totalassets in the right side of the balance sheet.
The items of financial statements can be overstated and understated the debits and thecredits wisely.The buyback of its assets at an inflated price shows the increment on the left side of thebalance sheet.All these ways and various practices are at the disposal of the creative accountant throughwhich the accountant can attempt to attain those objectives.In an unethical way the creative accounting used resulted in most scandals with heavyconsequences, it is necessary to establish effective methods that will minimize the manipulatedactivities in an organization. The adaptation of accounting standards based on the limited use offuture forecast and constant application of accounting method in the accounting practice. Theorganization recognizes and insists on the role of the external auditor and internal auditor to auditthe financial reports to identify and report the unfair forecast and also for the prevention ofaccounting manipulation in numerous ways. The efficiency can be also applied in a change ofaudit services from one financial year to another. It is necessary to hire independent directors andmembers of the audit committee regularly quarterly and annually. The basic function ofcorporate governance in financial reporting is to determine the compliance with policies of anaccounting standard. The establishment of efficient corporate governance controls theorganization. The company also indulged in developing a whistleblower policy. Placingattention on the development and application of forensic accounting leads to efficient working.The code of ethics in the company’s policy continuously makes awareness among theemployees. The main working is to make investors aware of the practices of manipulation takesplace in financial information. The penalties consistency to enforce by the national authorities.The benefits of creative accounting are to reduce the risk of the company by increasing the pricesof stock and on the other side to increase the profit trend for an organization. Numerous benefitsof creative accounting included capital raising by the issue of shares to the investors, disregardtakeover by the other companies in the market and offering of own shares in bids to takeoverbids are in favor of creative accounting. When it comes to the reduction of variation of thecompany's income, this helps the company to achieve a good image in the open market, in return,this indicates that the company helps in many issues to face directly or indirectly.Main elements of Creative Accounting are:GAAPoften allows various methods of accounting that can choose by companies, publiccompanies using for the disclosures of the financial information. With the complex tradingpractices, new accounting standards introduced to mitigate unethical activities. The ramificationsof these activities are increased alternatives that a company used to achieve the goals. The realoperational results hide and the true financial position of the company the audit held to find outthe resulted consequences difference. In various accounting scandals, the unethical decision ofmanagement led to adverse consequences. These consequences of a manager's decision affect theentire society as well. That's why managers are responsible for the re-examination of financial