Accounting, 3rd Edition

Chapter 13

Creative accounting

‘Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed to protect the guilty. It is the biggest con trick since the Trojan Horse.’

Ian Griffiths (1986), Creative Accounting, Sidgwick and Jackson p. 1.

Learning Outcomes

After completing this chapter you should be able to:

• Explain the nature of creative accounting.
• Outline the managerial incentives for creative accounting.
• Demonstrate some common methods of creative accounting.
• Understand the real-life relevance of creative accounting.

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Chapter Summary

• Creative accounting involves managers using the flexibility within accounting to serve their own interests.
• The regulatory framework tries to ensure that accounts correspond to economic reality.
• Management will indulge in creative accounting, inter alia, to flatter profits, smooth profits or manage gearing.
• Revenue, inventories, depreciation, interest payable, and brands can all be managed creatively.
• In extreme cases, such as Parmalat, Polly Peck, WorldCom or Enron creative ...