Creative Accounting

introduction

A term used to describe the practice of

applying inappropriate accounting policies
or entering into complex or special
purpose transactions with the objective of
making a companys financial statements
appear to disclose a more favourable
position, particularly in relation to the
calculation of certain key ratios
Mislead users of financial statements
Following the law
(regulations),the standards (IASs ,
IFRSs) and the recommended
practice , and even with the
results audited by external
companies, the scope for creative
accounting remains large
definition
Using the flexibility with in
accounting to manage the
measurement and presentation of the
accounts so that they serve the
interest of preparers.
Also known as aggressive
accounting ,its the operation on
financial numbers , usually within the
orbit of the law and accounting
standards but not providing a true
and fair value.
Transformation of financial
accounting figures from what they
Why use creative accounting?
The shareholder and market
reaction depends more and
more on managers actions and
directors are increasingly
judged on profit and growth.
So company present a report to
investors to see and at times like
this, needs creative accounting.
Creative accounting used to:
Hide a particularly bad year for the company
Force an exceptionally good year
Continue the pressure to always be the best
Smooth out results to give an impression of
stability or sustained improvement
Boost assets to avoid take-over
Survive from bankruptcy
Profit more
Pay less tax
To attract investor
To increase (fake) transaction
Boost the share price

Creative accounting methods

Allow company to choose between
different accounting methods such as
writing of development costs or amortising
it
Certain entries in the account involve
unavoidable degree of estimation ,
judgment and prediction
Artificial transactions can be used to
manipulate balance sheet and move profit
s between accounting periods
Genuine transactions can be timed to give
desired impression in the accounts
 Creative accounting practices
Movement of sales
Movement of interdivisional sales i.e. From subsidiary to
parent or parent to subsidiary companies causing depiction
of higher growth of sales
Income
recognition
By adjusting the profits from one year to another year
to another year leading to impression management of
the financial performance of the company.
Corporate takeover
Leads to the adjustments in the assets , liabilities and
capital of the organization ,thus leading to the effective
financialsheet
Off-balance position.
financing
Leasing, higher purchases , share buyback , Special
Purpose vehicles are tools used to arrange finance
 Overstatements of assets

Can be done various assets such as

inventory , cash .,plant & equipment ,
investments & Other current assets.

Some Other Accounting Practices:

Follow-up of matching concept

Adjustment in the capital employed
Movement in inventory
Manipulating the value of goodwill and intangibles
 Conclusion

Creative accounting should be used

if it is with the ramification of the law
and achieves the companys ultimate
goal of increasing stock value. Must
benefit company in the short run and
long run.
Not to mislead users of F/S
Questions ?
Thank you !

Presented by
Pavan kumar
Roll no:6721601