Creative Accounting

Creative Accounting: Auditors’ Roles in the Detection of

Financial Fraud

by Zuraidah Mohd-Sanusi and Yusarina Mat-Isa

This Chapter Covers

* An introduction to creative accounting concepts and methods.

* Areas of possible manipulation of company accounts.

* The use of a checklist to help in the detection of creative accounting practices and accounting fraud.

* Case studies of two companies in Malaysia that have used creative accounting practices.

* What is expected of auditors in detecting creative accounting practices.

Introduction: Understanding the Concepts of Creative Accounting

“Creative accounting practices” is a term used to describe any means that may be employed to manipulate financial data, and it includes the aggressive choice and application of accounting principles as well as fraudulent reporting (Mulford and Comiskey, 2002). These practices may fall within or beyond the boundaries of Generally Accepted Accounting Principles (GAAP). Creative accounting practices cover a wide range of areas, especially premature recognition of and over- or underestimation of revenue, aggressive capitalization and extended amortization policies, misreporting of assets and liabilities, and getting creative with the income statement and cash flow reporting. If an organization wishes to practice creative accounting, there is plenty of scope for the manipulation of accounting information. Such manipulation may well leave external or other interested parties confused as to what is real or unreal, or true or false, in a published set of financial statements.

Accounting techniques are normally chosen to produce more meaningful financial numbers, and any changes in these techniques will usually be clearly indicated in the notes to the accounts. In contrast, creative accounting is more often applied as way of hiding a particularly bad performance. The management may opt for accounting techniques that will give the impression of an exceptionally good...