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

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Chapter 10

Accounting Scandals in Germany

Hansrudi Lenz

10.1 INTRODUCTION

In this chapter I describe important accounting scandals in Germany with respect to their motives, structure of accounting transactions, with related balance sheet and profit and loss items, and the reactions of concerned parties (supervisory board, regulatory agencies, management, auditors, the public).

Accounting scandals occur where companies have adopted questionable accounting practices in quarterly or annual reports characterized by high media coverage. I distinguish between creative accounting and fraudulent reporting.1 Misstatements can arise directly from fraudulent financial reporting (e.g. the booking of fictitious receivables), or indirectly in conjunction with the misappropriation of assets (e.g. theft of inventory which is falsely recognized in the accounts as depreciation of damaged inventory) (see for details ISA 240, redrafted 2006).

When there are material misstatements due to fraud, then three conditions are generally present: (i) incentives or pressure; (ii) perceived opportunities to commit the fraud; and (iii) inner attitudes to rationalize or justify the fraud. Generally, risk factors are grouped into these three categories (see, for example, ISA 240; Loebbecke et al., 1989). This concept can also be applied to legal, but in the eyes of the public questionable, earnings management or creative accounting. In the following description of accounting scandals I try to identify risk factors ...

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