Creative accounting is a euphemism referring to accounting practices that may follow the letter

of the rules of standard accounting practices, but deviate from the spirit of those rules. They are
characterized by excessive complication and the use of novel ways of characterizing income,
assets, orliabilities and the intent to influence readers towards the interpretations desired by the
authors. The terms "innovative" or "aggressive" are also sometimes used. Other synonyms
include Cooking the books and Enronomics.
The term as generally understood refers to systematic misrepresentation of the
true income and assets of corporations or other organizations. "Creative accounting" has been at
the root of a number of accounting scandals, and many proposals for accounting reform usually
centering on an updated analysis of capital and factors of production that would correctly reflect
how value is added.
Newspaper and television journalists have hypothesized that the stock market downturn of
2002 was precipitated by reports of "accounting irregularities" at Enron, Worldcom, and other
firms in theUnited States.
One commonly accepted incentive for the systemic over-reporting of corporate income [1] which
came to light in 2002 was the granting of stock options as part of executive
compensation packages. Since stock prices reflect earning reports, stock options could be most
profitably exercised when income is exaggerated, and the stock can be sold at an inflated profit.
The most notable activist is Abraham Briloff (professor emeritus of CUNY Baruch) who for years
wrote a column forBarron's that constantly analyzed breaches of ethics and audit professionalism
among CPA firms. His book is calledUnaccountable Accounting.[2] The profession, in turn, was
not kind to Dr. Briloff[3] but much of what he advocated has been forced on the industry in the
wake of the Enron scandal (See Sarbanes-Oxley).
According to critic David Ehrenstein, the term "creative accounting" was first used in 1968 in the
film The Producers by Mel Brooks.[4]
Contents
[hide]

1Earnings management

2The motivations of creative accounting

3See also

4References

5Further reading

6External links

Earnings management[edit]

Main article: Earnings management

Creative accounting can be used to manage earnings.[5] Earnings management occurs
when managers use judgment infinancial reporting and in structuring transactions to alter
financial reports to either mislead some stakeholders about the underlying economic
performance of a company or influence contractual outcomes that depend on reported
accounting numbers.[6]

The motivations of creative accounting [edit]

Personal incentives

Bonus-related pay

Benefits from shares and share options

Job security

Personal satisfaction

Cover-up fraud

Tax management

Management buyouts

See also[edit]

Corporate abuse

Hollywood accounting

References[edit]
1.

Jump up^ Corporate tax

2.

Jump up^ Abraham J. Briloff

3.

Jump up^ Owsen, Dwight M. (Spring 1999). "The AICPA's Prosecution of Dr. Abraham
Briloff, Some Observations". In the Public Interest(American Accounting Association) 27 (2).
Archived from the original on December 21, 2004.

4.

Jump up^ The Producers - From the Current - The Criterion Collection

5.

Jump up^ "Creative Accounting". Investopedia. Retrieved 14 January 2014.

6.

Jump up^ Healy, P. M. and J. M. Wahlen. 'A review of the earnings management
literature and its implications for standard setting',Accounting Horizons, December 1999, pp. 365
383.