Creative Accounting

Tip / Finance and Investing

Creative Accounting
Sisira Mishra , Professor, India

Unorthodox accounting practices are explicitly illegal.

Creative accounting, also called aggressive accounting, is the manipulation of financial numbers, usually within the letter of the law and accounting standards but very much against their spirit and certainly not providing the “true and fair” view of a company that accounts are supposed to. It is an art of manipulating the figures to mislead the facts. To an extent, accounting irregularities of this type can be misleading to potential investors, and thus are often considered to be unethical, even though the strategy may remain within the letter of the law. Typical creative accounting tricks include (i) Off-Balance Sheet Financing. (ii) Over-optimistic revenue recognition and (iii) the use of exaggerated non-recurring items. In recent years, a number of nations have taken steps to minimize the incidence of creative accounting by implementing regulations that make it more difficult for businesses to cook the books and present a financial position that does not tell the entire story. The hope is that by doing so, investors will be able to obtain all the data required to make an informed decision about their investment options, and prevent the economy from being adversely affected by misleading financial accounting practices at major corporations. Since there are a number of ways to engage in creative accounting, chances are it will take a number of years to craft regulations that will make those unorthodox accounting processes explicitly illegal.

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