Disadvantages Of Creative Accounting

1.0) ABSTRACT

The use of creative accounting has become a debatable issue since there are parties each in favour and against the utilization of creative accounting. Whereas the management has its own opinion in favour of creative accounting, the use of the practices of creative Accounting, its critics are of various opinions and have apprehensions relating to its use. Though it is a debatable topic still studies reveal that the practices of creative accounting will be wisely applied with moral concerns. The current paper makes an attempt to focus on the benefits and drawbacks of creative accounting by listing its importance to numerous interest teams. The study reveals that creative accounting helps to resolve several issues that are faced

But for now creative accounting refers to the use of accounting knowledge to influence the reported figures, while remaining within the jurisdiction of accounting rules and laws, so that instead of showing the actual performance or position of the company, they reflect what the management wants to tell the stake holders.

Not only that, to investigate the ethical issues raised by creative accounting we will:

1) Explore some definitions of creative accounting

2) Consider the various ways in which creative accounting can be undertaken.

3) Explore the range of reasons for a company’s directors to engage in creative accounting.

4) Review the ethical issues that arise in creative accounting.

Four authors in the United Kingdom, everyone writing from a different perspective, have explored the issue of creative accounting.

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

“Every company in the country is fiddling its profits. Every set of published accounts 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 trick since the Trojan horse. . . In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting”.

this flexibility provides opportunities for manipulation, deceit and misrepresentation. These activities - practised by the less scrupulous elements of the accounting profession - have come to be known as 'creative accounting'”. (1988: 7-8)

Terry Smith reports on his experience as an investment analyst:

“We felt that much of the apparent growth in profits which had occurred in the 1980s was the result of accounting sleight of band rather than genuine economic growth, and we set out to expose the main techniques involved, and to give live examples of companies using those techniques”. (1992:4)

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 preparer desire by taking advantage of the existing rules and/or ignoring some or all of them”. (1993:2)

It is interesting to observe that Naser perceives the accounting system in Anglo-Saxon countries as particularly prone to such manipulation because of the freedom of choice it permits. Two features are common to all four writers:

1 They perceive the incidence of creative accounting to be common.

2 They see creative accounting as a deceitful and undesirable