Chapter 13

Creative Accounting and Accounting Scandals in Italy

Andrea Melis


Italy has had a long tradition of creative accounting. Greco (1933) and Della Penna (1942) described many creative accounting practices used in the financial statements of Italian listed and unlisted companies during the first decades of the last century. Such creative accounting practices included premature recognition of revenues from sales due to recording revenues before goods were shipped, compensation between credits to customers and debts to suppliers (which became illegal in the 1940s), unrealized equity increment (i.e. the reporting of equity before the shares were actually sold to the investors), as well as several practices of creating hidden reserves in order to smooth future reported income, such as the manipulation of the inventory valuation, of the depreciation costs of tangible assets, and of the probability of uncollectible trade debtors.

Masini (1947) reported that during the 1930s, the practice of preparing multiple financial statements for the same year was widespread. Italian companies used to prepare and present two different financial statements: (a) the one which got published (the annual report), which was prepared by the board of directors to safeguard the interests of the owners (or major shareholders); and (b) internal (non-published) financial statements, which correctly represented the patrimonial (i.e. assets, liabilities and equity) and financial position ...

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