Manipulating Business Performances by Creative Accounting

Manipulating Business Performances by Creative Accounting

Ionica Oncioiu (Titu Maiorescu University, Romania), Traian Ovidiu Calotă (Titu Maiorescu University, Romania) and Alin Eliodor Tănase (Titu Maiorescu University, Romania)
DOI: 10.4018/978-1-7998-3473-1.ch003
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The dual nature of creative accounting has been intensely debated since its emergence in the Anglo-Saxon economies. The lack of a common accounting language, different accounting systems at international level, applied in different languages, international legislation harmonized more or less correctly, amidst a turbulent economic environment, left room for multiple interpretations and meanings. This chapter presents the advantages of fair value in manipulating business performances by creative accounting, but there are voices that are challenging this concept because of its volatility and tendency to subjectivism, and also manipulating the models used to evaluate balance-sheet structures or profit and loss account. The results show that fair value was introduced by accounting norms in response to the deterioration of confidence in the financial statements and targets a new system for assessing the entity's assets and liabilities.
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The manipulation of accounting values or the practice of creative accounting is possible due to the gaps in the accounting regulations and due to the freedom to choose and decide between the accounting methods allowed for the treatment of different categories of balance sheet items or the profit and loss account. The risk of misrepresentation of results is not an easy to measure risk, which makes it difficult to compare the results of entities in the same industry or to perform other financial analyzes (Akpanuko & Umoren, 2018).

On the other hand, the interests determined by factors such as intensity of competition or increased pressure on businesses to communicate the „digestible” results, especially from investors and analysts, make the information collected by market valuation experts and accountants mitigate the possible effects of creativity (Chen, Qu & Sun, 2017). If the purpose of creative accounting is to improve the accounts (or the image created for the company), taking advantage of the weaknesses and deficiencies of accounting regulation, the authors consider that this concept is nothing new, because the principle of accounting options has been known for a long time (Holthausen & Watts, 2001; Baker & Bettner, 1997; Caylor, 2010).

The emergence of creative accounting was influenced by the flexibility of international accounting rules (Damayant, 2013). Creative accounting is treated in most cases negatively (negative creation), designed to lead to achieving value for intangible assets able to respond to the wishes of managers on the company's financial position and performance (Doukakis, 2014). Simultaneous treatment of creative accounting as a tool to achieve the interests of accounting and accounting engineering is based on the accounting policies adopted by a patrimonial entity to produce and communicate information (Richardson, 2011; Jackson & Liu, 2010; Ball, Li & Shivakumar, 2015).

Accountants who accept the ethic challenge of creative accounting should be aware of the abuse to both the choice of accounting policies and to the handling of transactions (Byard, Li & Yu, 2011). Such accounting has developed mainly in Anglo-Saxon economies due to the freedom of the accounting profession. It was placed on the edge of the legal form and economic substance of transactions and events (Barth et al., 2014). Discussed in terms of accounting practitioners, creative accounting has facilitated the emergence of basic and alternative treatments used to solve problems (Ahmed, Neel & Wang, 2013; Barth, Landsman & Lang, 2008; Fan, Li & Zheng, 2016). Of course, issues of evaluation of assets are cases of creative accounting practice that involve subjective reasoning as it applies to the professional accountant or expert appraiser. Using creative accounting for intangible assets, for example, especially in its gray area favored by accounting rules, makes it difficult or even impossible to guess the true value of these assets (Li, 2010; Ozkan, Singer & You, 2012; Barth, 2013).

In this context, the following questions arise: will we return to accounting at the initial cost, in which intangible assets are recorded at outdated values and are therefore not relevant or reliable? How important are the psychological factors in accounting measurement? Can a model of assessment ensure the maximum quality of the accounting information on intangible assets? The answer to these questions, as well as various controversial issues of the fair value concept of intangible assets, are presented in the current draft of the International Accounting Standards Board (IASB) and the American Accounting Standards Board (FASB). As a result, today, we perceive an accelerated rate of change, aggressive disruptive phenomena and emerging economies that are rapidly developing against the backdrop of a Digital Era (Chen et al., 2010; He, Pan & Tian, 2017).

Key Terms in this Chapter

Accounting Engineering: The process whereby, given the existence of gaps in the rules to manipulate accounting numbers and taking advantage of flexibility, those practices are chosen for measurement and information that allow transforming synthesis documents from what they should be in what managers want.

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.

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.

Fair Value: The amount at which an asset is bought or sold in an arm’s-length transaction, in which neither party is forced to act.

Convergence of Accounting: The process by which accounting standards are developed in a manner that is able to lead to the same act or purpose, by showing the similarity of national, regional, international.

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