Creative Accounting and Its Impact on Financial Statements

Creative Accounting and Its Impact on Financial Statements

Gabriela Claudia Oncioiu (Titu Maiorescu University, Romania) and Alina Stanciu (1 Decembrie 1918 University, Romania)
Copyright: © 2020 |Pages: 12
DOI: 10.4018/978-1-7998-0178-8.ch013

Abstract

Creative accounting responds to the same issue faced by the management, but the answer lies at the boundary between the legal and de facto recording of the economic event, leaving accountants to create the entity's economic reality. The manager of the entity can choose from the multitude of accounting treatments and policies, the one that is most convenient and responds best to their own interests, which implies that the outcome may be convenient and not necessarily true. This chapter presents the implications and challenges of creative accounting on financial statements. The results show that the main controversy raised by the standards refers to the need for periodic reassessments and the possibility of choosing a method of measuring the value, which creates premises for the practice of creative accounting.
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Background

It is obvious that theorists have had different approaches to the concept of creative accounting. If for some authors the attribute of creativity in accounting is represented by a set of procedures that take into account the change of the level of the result in order to increase or decrease it, or the presentation of the financial statements without these objectives being excluded from each other, for others it represents the aggregation of accounting techniques and operations which, without departing from the accounting rule, allow the managers of an enterprise to change the resulting amount or change the appearance of the accounting documents (Ahrens, 2008; Bettner & Kate, 2013; Lukka, 2010; Ramanna, 2008).

The year 2006 brings new approaches to creative accounting (Brown, 2010). Thus, Holthausen and Watts (2001) argue that the real incentive for creative accounting is represented by the conflicts of interest between different groups: the case of investors and shareholders wishing to obtain more capital gains and dividends, while employees intend to get higher wages and share profit, or target shareholders who are interested in paying lower dividend taxes, while the country’s tax authorities would like to collect more taxes.

Following this negative strand, for some time creative accounting has been isolated from other sciences and practices. The one who noticed it from a positive perspective was Doukakis in 2014, who feels that there may be flexibility in accounting, which at the same time provides a true and fair view of the accounts so that they can serve its interests while also taking the form of fraudulent financial reports when used for managing, measuring, and presenting accounts so as to serve the interests of financial statements and fraud, or to give a false picture to the accounts.

Key Terms in this Chapter

Creative Accounting: A tool to create a distortion of the quality of financial information, creating uncertainty about the consistency and comparability of information for users, in which case we are dealing with an accounting of intent.

Decision: A person or group of persons’ social and deliberate act defining the purpose and the objectives of a certain action, the directions and the ways to achieve that action, all of them determined, according to a certain need, by a process of obtaining information, deliberation, and assessment of the means and consequences of carrying out that action.

Financial Engineering: Represents an aggregate of procedures, which have as objective the modification of the level of the results while taking into account the optimization, minimization, or presentation of financial situations.

Financial Accounting Standards Board (FASB): Set up and develop generally accepted accounting principles.

Organizational Performance: Elements affecting company performance such as financial and marketing factors, return on sales, return on investment, etc.

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