Problem

Creative accounting

Other Names:
Distorted representation of financial accounts
Doctoring balance sheets
Nature:

Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distorting results in favor of the "preparers", or the firm that hired the accountant. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms "innovative" or "aggressive" are also sometimes used. Other synonyms include "cooking the books" and "Enronomics", named after the Enron fraud. Creative accounting is oftentimes used in tandem with outright financial fraud (including securities fraud), and lines between the two are blurred. Creative accounting practices are known since ancient times and appear world-wide in various forms.

The term as generally understood refers to systematic misrepresentation of the true income and assets of corporations or other organizations. "Creative accounting" has been at the root of a number of accounting scandals, and many proposals for accounting reform—usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added.

Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of "accounting irregularities" at Enron, Worldcom, and other firms in the United States.

One commonly accepted incentive for the systemic over-reporting of corporate income which came to light in 2002 was the granting of stock options as part of executive compensation packages. Since stock prices reflect earning reports, stock options could be most profitably exercised when income is exaggerated, and the stock can be sold at an inflated profit.

Abraham Briloff, professor emeritus of CUNY Baruch, for years wrote a column for Barron's that constantly analyzed breaches of ethics and audit professionalism among CPA firms, and he wrote a book called Unaccountable Accounting. The profession, in turn, was not kind to Briloff, but much of what he advocated has been forced on the industry in the wake of the Enron scandal (See Sarbanes-Oxley).

According to critic David Ehrenstein, the term "creative accounting" was first used in 1968 in the film The Producers by Mel Brooks, where it is also known as Hollywood accounting.

Problem Type:
E: Emanations of other problems
Related UN Sustainable Development Goals:
GOAL 16: Peace and Justice Strong Institutions
Date of last update
24.04.2019 – 11:35 CEST