Chapter 5

Evidence for Creative Accounting and Fraud

Michael Jones

5.1 INTRODUCTION

There have been many studies that have investigated the evidence for creative accounting and, to a lesser extent, fraud. These studies can roughly be divided into descriptive and statistical studies. This chapter will investigate these studies. The descriptive studies look at the topic of creative accounting and fraud and then cite examples of individual companies and case studies.1 Some of the statistical studies use very complicated and complex statistical methodologies. Generally, the statistical studies more often focus on creative accounting in aggregate rather than on fraud. However, there is also a body of literature which seeks to relate corporate governance characteristics (such as presence of an audit committee) to the incidence of fraud. The aim of this chapter will be just to give a simplified overview of these studies.2 Generally, here the intent is to focus on one or two of the most illustrative and informative studies in each category.

5.2 THE DESCRIPTIVE STUDIES

These studies are usually reports or books that address the topic of what they normally call creative accounting.3 Figure 5.1 lists 10 of these studies. The earliest of these was the seminal book by Ian Griffiths in 1986 that first brought the topic of creative accounting out into the open (Griffiths, 1986). Two influential reports followed by County Natwest WoodMac (1991) and UBS Phillips & Drew (1991). The report by UBS ...

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