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Creative Accounting, Fraud and International Accounting Scandals by Michael John Jones

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Chapter 1

Introduction – Setting the Scene

Michael Jones

1.1 INTRODUCTION

Accounting scandals, creative accounting and fraud are perennial. They range from ancient Mesopotamia to the South Sea Bubble in 1720 to Enron and Parmalat today. They occur in all eras and in all countries. As accounting forms a central element of any business success or failure, the role of accounting is crucial in understanding such business scandals. Accounting enables businesses to keep a set of records to give investors and other users a picture of how well or badly the firm is doing. However, sometimes when businesses are doing badly managers are tempted to use accounting to enhance the apparent performance of the firm in an unjustified way. In addition, managers may wish to use the flexibility within accounting to serve a range of managerial interests such as to boost profits or increase assets. This can be done legally by using creative accounting to exploit the flexibility within accounting. Alternatively, in other cases management will indulge in false accounting or fraud. In this case, management will step outside the rules and regulations that govern accounting. Often this will be because management has got into serious financial difficulties and is looking for any way to postpone corporate collapse. Managers may use prohibited accounting techniques, falsify records or even record fictitious transactions. In some cases, companies start with creative accounting, but end up committing fraud.

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