Analysis on Creative Accounting

Summary

The flexibility in accounting allows companies to adopt creative accounting and fraud to bolster profits. Such techniques have seriously eroded the legitimacy of accounting so as to hinder the development of an economy. This essay introduces various parties involved in creative accounting and illustrates how they are affected. Another cause induced by the economic environment will then be listed afterwards following by recommendations on reducing the likelihood of creative accounting and fraud.

In general, there are a variety of parties who play a vital role in creative accounting. Some of them benefit while others suffer. Managers, being gainers, regard creative accounting as a way of influencing the accounts in order to deliver the 'right' result, using flexibility and subjectivity to serve their own interests without being detected. Unless the company collapses, shareholders may also benefit from creative accounting since such techniques can present a more obsequious view of the firm which in turn may give rise to an increase in the share price. Meanwhile, merchant bankers can make a profit as well by devising complex creative accounting schemes and selling them to companies.

In comparison, however, some other parties are harmed and are therefore opposed to creative accounting. Objectors, such as regulators, dislike creative accounting because it is used to evade accounting rules insidiously which then debases the credibility of the accounts. If companies collapse, shareholders are likely to be harmed as well. For auditors, there is the added dilemma of deciding whether or not to qualify the accounts, since both situations will result in blame either from their clients or the society. In addition, other users of the accounts like suppliers and bankers may be misled by a company's result and end up incurring a loss. Moreover, where creative accounting fails, fraud may then be adopted. If this is the case, then prosecutors and legal authorities become...