Creative Accounting

Introduction to Creative Accounting

In spite of the proliferation of accounting rules and the independent checks which are imposed, regards over the quality of published financial statements surface from time to time. There are instances while directors apply specific accounting policies, or structure particular transactions, in such type of a way as to portray a picture of financial health that is in line along with what they need users to see, than what is a true and fair view of financial position and performance. Misrepresenting the performance and position of a business according to this way is termed as creative accounting and it poses a main problem for accounting rule makers and for society usually.

Creative accounting and economic growth

Several years ago there was a wave of creative accounting scandals, specifically in the US (united state) but also in Europe; though, it seems that this wave has now subsided. The quality of financial statements is enhancing and, it is to be hoped, trust between investors and others is being restored. The result of the actions taken through several regulatory bodies and through accounting rule makers, creative accounting has become a more dangerous and hard process for those who attempt it. Though, it will never disappear totally and a further wave of creative accounting scandals may take place in the future.

The recent wave corresponded with a period of strong economic growth and, throughout good economic times, investors and auditors become less vigilant. So, the opportunity to manipulate the figures becomes very easy. So, we must not become too complacent.

Things might vary again when we next experience a period of strong growth.

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