CREATIVE

ACCOUNTIN

G

DEFINITION OF CREATIVE

ACCOUNTING

Using the flexibility within accounting to manage the measurement and presentation

of the accounts so that they serve the interest of preparers

Misleadi

ng

Manipulation

Fraud Delusional

Bankruptcy

Cover-

up

Ian Griffiths, writing from the perspective of a business journalist, observes:

EXPERT’S

VIEW

“Every company in the country is fiddling its profits. Every set of publishedaccounts is based on books which have been gently cooked or completely

roasted. The figures which are fed twice a year to the investing public have

all been changed in order to protect the guilty. It is the biggest con tricksince the Trojan horse. . . In fact this deception is all in perfectly good taste.It is totally legitimate. It is creative accounting.”

EXPERT’S

VIEW

Kamal Naser, presenting an academic view, offers this definition:

“Creative accounting is the transformation of financial accounting figures

from what they actually are to what preparers’ desire by taking advantageof the existing rules and/or ignoring some or all of them.”

WHY CREATIVE ACCOUNTING?

Directors and managers are increasingly judged on

Profit Growth EPS (earning per share) Their actions

An annual review or report provides information on these things. It is a snapshotof the company situation, as well as a history of change. the message the reviewgives is often taken to be about the future position of the company.

Directors and managers job, salary and bonus and also a company’s investmentand investor number depend on this info.

So companies (and directors) want to use the report to present the message theywant investors to see, and at times this needs creative accounting.

WHY CREATIVE ACCOUNTING?

Income soothing

Survive from bankruptcy

Profit more

Pay less tax

Boost the share price

To increase (fake) transaction

To attract investor

Reasons for creative accounting:

There may be one-off events which so distort the figures that the underlying

health of the company is obscured. Accounting techniques may be used to

produce more meaningful figures and avoid unjustified market pessimism. In such

cases the changes may be clearly indicated in the notes to the accounts.

JUSTIFIED REASONS FOR CREATIVE ACCOUNTING

UNJUSTIFIED REASONS FOR CREATIVE ACCOUNTING

Hide a particularly bad year for the company.

Smooth out results to give an impression of stability or sustainedimprovement.

Hide large profits by monopolies under anti-trust threat; boost assets toavoid take-over

Distortion in one year’s figure may lead to distortion of figure in the nextyear and thus the bad cycle continues

MANIPULATABLE SECTIONS

Manager

Can

Manipulate

INCOM

ESTOCK

DEPRECIATION GOODWILL

BRANDSINTEREST

PAYABLE

TECHNIQUES OF MANIPULATION

BIG BIRTH

CHARGES

CREATIVE ACQUISITION

ACCOUNTING

COOKIE JAR

RESERVES

MATERIALIT

Y

REVENUE RECOGNITION

ROUND TRIP

FAKE REVENUE &

RESERVER

DEPLETATION

REVERSALS OF

ACCUREL

ACCOUNTING

GROSS

PROFIT

ENTRIES

LITIGATION SETTLEMENT

DEAD

DEAL

SLUSH

FUND

SCANDALS

SCANDALS

SCANDALS

SCANDALS

WASTE MANAGEMENT$ 1.7 BILLION FAKE EARNING

TYCO$ 500 MILLION

INFLATED INCOME

$ 150 MILLION

STOLEN

HEALTHSOUTHINFLATED EARNING $ 1.4 BILLION

FREDDIE MACMISSTATED EARNING $5

BILLION

BERNIE MADOFFPONZI SCHEME OF

$64.8 BILLION

SATAYAM ITFALSELY BOOSTE REVENUE

1.5 BILLION

DETECTING CREATIVE

ACCOUNTING

Financial statements analysis using ratio and the less difficult

Cash flow analysis

CONCLUSION

“A con artist’s con-idea can be impressive but it will never be appreciated”

“We cant make 1+1=11, we have to do it right because the answer is always 2”

THANK YOU!