Chapter 4

Methods of Creative Accounting and Fraud

Michael Jones

4.1 INTRODUCTION

There are innumerable different methods of creative accounting. These arise because of the inherent flexibility within accounting. Each set of accounts consists of a myriad of different items of income, expenses, assets, liabilities and equities. For each different item there will be an accounting policy. As there are many accounting policies the opportunity arises to adapt and alter accounting policies so as to change the reported accounting figures. Indeed, one easy way to confuse investors is to continually change your results. As Robert Townsend (1970, p. 89) states: ‘The easiest way to do a snow job on investors (or on yourself) is to change one factor in accounting each month. Then you can say, “It’s not comparable with last month or last year and we can’t really draw any conclusion from the figures”.’ The consistency concept limits but does not curtail companies’ ability to do this. In the USA, WorldCom, which collapsed in 2002, was accused of repeatedly revising and restating its accounts. It was a pioneer of what was called proforma accounting.

The three main financial statements in a company’s accounts are the income statement (also known as the profit and loss account), the balance sheet (also known as the statement of financial position) and the cash flow statement. In each of the three statements there will be different objectives for the creative accountant. In the income statement ...

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