Question

Do you think Creative Accounting can be used to enhance reporting of financial information to report users or is it simply a part of fraudulent accounting behaviour?   

Answer 1

Creative accounting is simply a part of fraudulent accounting behavior. Creative accounting is used to show a favorable picture of financial statements by applying inappropriate accounting principles. It is a tool used to misguide the users of financial statements by showing a good position which is different from the actual position. It is a method used by the company or its directors to deviate the investors by showing the position what they want to see as showing the higher profit as compared to the actual and showing the incorrect EPS. By using this tool directors try to show the sustainable growth of the company to attract the investors and trying to cover up the bad results for the company. The ways in which creative accounting is used:-

1. Recording income prior to the supply of goods/completion of service.

2. Recording the sales proceeds of fixed assets as revenue.

3. Capitalising the revenue expenditure in order to increase the income.

4. Creating provision with the less amount.

Most of the common method used for creative accounting is the figures in the main statement like the balance sheet or profit and loss account shows the different amount as what they show in notes to accounts. Thus we can say that creative accounting is a part of fraudulent accounting behavior.