Is Creative Accounting a Form of Manipulation?

IS CREATIVE ACCOUNTING A FORM OF MANIPULATION?

Balaciu Diana University of Oradea, Faculty of Economics, Department of Finance-Accounting, Oradea, str. Universit ii nr. 1, e-mail: dbalaciu@uoradea.ro, tel:0259/408401 Pop Cosmina M d lina University of Oradea, Faculty of Economics, Department of Finance-Accounting Oradea, str. Universit ii nr. 1, e-mail: cpop@uoradea.ro, tel:0259/408401 Abstract: Manipulation of financial information which is called by several terms such as earnings management, income smoothing, creative accounting practices, aggressive accounting or account manipulation, prevents the allocation of resources in the most efficient areas in the economy. The scope of this paper is to relate the causes, the main motivations behind their application, the objectives, the methods and the consequences of manipulation in financial reporting. Creative accounting is not a new technique, but it can be seen as a costly one. Businesses feel the pressure to appear profitable in order to attract investors and resources, but deceptive or fraudulent accounting practices often conduct to drastic consequences. Key words: creative accounting, window dressing, fraud, account manipulation

Introduction

Accounting manipulation is defined as when the managers of an organization intentionally misstate their financial information to favourably represent the entity’s financial performance. Managers of nonprofits organizations may have incentives to manipulate their reported program-spending ratios because donors use them in determining contribution decisions. Accounts manipulation represents the use of management’s discretion to make accounting choices or to design transactions so as to affect the possibilities of wealth transfer between the company and society (political costs), funds providers (cost of capital) or managers (compensation plans). In the first two cases, the firm benefits from the wealth transfer. In the third, managers are acting against the firm. Figure 1...