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Creative Accounting – a Creation for Destruction: with Reference to Some Global Instances

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Creative Accounting – a Creation for Destruction: with Reference to Some Global Instances The BESC Journal of Commerce and Management (Print ISSN: 2395-4639, Volume 3, July 2017) Included in the UGC Journal List: Journal No. 44452 Online issue URL: http://bjcm.bescollege.net/v3n1 Online article URL: http://bjcm.bescollege.net/v3/n1/v3n101.pdf Creative Accounting – a Creation for Destruction: with Reference to Some Global Instances Dr. Anish Kumar Dan Assistant Professor in Commerce, Bangabasi College. Email: [email protected] Abstract Lawmakers of accounting profession got disrupted by some sensational news recently. Bankruptcy of Enron, a Fortune 500 company and some high profile companies viz. Xerox, World Com, Satyam have created ripple in the corporate world since the reason behind this is not always the recessionary phase of global economy. More interestingly, these have happened in USA and India, considered to be the Mecca of professional and transparent accounting. At one end introduction of Corporate Governance, mandatory application of stringent Accounting Standards associated with growing regulatory role of Security Exchange authorities and at the other end the events of accounting frauds, auditor-company collusion and window dressing of accounts under camouflaged wording of audit report have put the accounting profession on the cross road of Creative versus Credible Accounting. Idea of ‘Creative Accounting’ developed from accounting practice that is technically correct but deviates from how accounting policies were intended to be used. In general, creative accounting capitalizes on loopholes in generally accepted accounting principles in order to disguise financial performance, such as by keeping debt off a balance sheet. The sorts of accounting irregularities that are often seen as creative accounting may be technically permitted but in general are frowned upon and often indicate fraud. Purpose of this paper is to move towards a practice of authentic accounting practice, where the primary purpose is to follow generally accepted accounting principles (GAAP), to prepare financial statements to be used by various external and internal stakeholders. Potential external stakeholders include investors, financial analysts, employee groups, lenders, suppliers and even government agencies. For the purpose of analysis, ten corporate scams of recent days are selected over the world. Chronologically arranged, those are: Waste Management Scandal (1998), Enron Scandal (2001), WorldCom Scandal (2002), Tyco Scandal (2002), HealthSouth Scandal (2003), Freddie Mac Scandal (2003), American International Group Scandal (2005), Lehman Brothers Scandal (2008), Bernie Madoff Scandal (2008) and Satyam Scandal (2009). In the concluding part we can state that, if the creative accounting starts with the loopholes in the accounting standards maybe one of the biggest roles belong to the standard setters in decreasing the possible negative effects of creative accounting. One of the main strengths of accounting standards is careful definitions and clear explanations of relevant accounting items which can prevent the abuse of accounting definitions that is fundamental to creative accounting. International Accounting Standards are continuously improving as new techniques of creative accounting are emerging, so we find creative accounting as a drive to the creation and improved International Accounting Standards. It would be unrealistic to think that it is possible to eliminate creative accounting or earnings management practices at all. However it would be possible to minimize at least the negative effects of them by adopting the accounting standards, giving more importance to ethical considerations and decreasing the flexibility of the managers in deciding among different accounting methods. Keywords: Creative Accounting, generally accepted accounting principles, stakeholders © The Bhawanipur Education Society College, 2017. Published by the Research & Publication Cell, P.G. Dept of Commerce, The Bhawanipur Education Society College, 5, Lala Lajpat Rai Sarani, Kolkata 700 020. www.thebges.edu.in. 2 The BESC Journal of Commerce and Management, Volume 3, July 2017 I. Introduction Accounting profession has yielded some sensational news recently. Bankruptcy of Enron, a Fortune 500 company and some high profile companies viz. Xerox, World Com, Satyam have created ripple in the corporate world since the reason behind this is not always the recessionary phase of global economy. More interestingly, these have happened in USA and India, considered to be the Mecca of professional and transparent accounting. At one end introduction of Corporate Governance, mandatory application of stringent Accounting Standards associated with growing regulatory role of Security Exchange authorities (e.g. SEBI, SEC) and at the other end the events of accounting frauds, auditor-company collusion and window dressing of accounts under camouflaged wording of audit report have put the accounting profession on the cross road of Creative versus Credible Accounting. Creative accounting refers to any accounting practice that is technically correct but deviates from how accounting policies were intended to be used. In general, creative accounting capitalizes on loopholes in generally accepted accounting principles in order to disguise financial performance, such as by keeping debt off a balance sheet. The sorts of accounting irregularities that are often seen as creative accounting may be technically permitted but in general are frowned upon and often indicate fraud. Creative accounting is also referred to by the phrase ‘cooking the books’, implying that these practices require falsification and omission in the presentation of company financial records. While unfortunately common and occasionally harmless, professional accountants are cautioned against resorting to these sorts of practices. II. Literature Review Some literatures in the related area are reviewed and the observations are summarized here. Griffith (1986) observed, “Every Company in the country is fiddling its profits. Every set of published accounts is based on books that have been gently cooked or completely roasted. The figures, which are fed twice a year to the investing public, have all been changed in order to protect the guilty. It is the biggest con trick since the Trojan horse…In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting.” According to Michael Jameson (1988), “The accounting process consists of dealing with many matters of judgment and of resolving conflicts between competing approaches to the presentation of the results of financial events and transactions…this flexibility provides opportunities for manipulation, deceit and misrepresentation. These activities - practiced by the less scrupulous elements of the accounting profession – have come to be known as ‘creative accounting’.” Newton L.H. (1988) opined that except for a small clutch of academic shark-defenders, everyone seems to know that hostile takeovers are wrong, destructive of people and industries, and damaging to the long-term competitiveness of corporate America. But analysis of the takeover process, absent insider trading, fails to identify any injury that is not replicated elsewhere in the business system. Current suggestions for remedying the situation seem inadequate, ill-fitted to the problem, or hostile to the entire capitalist system. Insider trading is illegal, and is widely believed to be unethical. It has received widespread attention in the media and has become, for some, the very symbol of ethical decay in business. For a practice that has come to epitomize unethical business behavior, however, insider trading has received unexpectedly little ethical analysis. The article of Moore (1990) critically examines the principal ethical arguments against insider trading: the claim that the practice is unfair, the claim that it involves a misappropriation 3 Creative Accounting – a Creation for Destruction: with Reference to Some Global Instances of information and the claim that it troubles ordinary investors and the market as a whole. The author concluded that each of these arguments has some serious insufficiencies; no one of them by itself provides a sufficient reason for outlawing insider trading. This does not mean, however, that there are no reasons for prohibiting the practice. Moore argued that the real reason for outlawing insider trading is that it weakens the fiduciary relationship that lies at the heart of American business. Timely and reliable accounting information is essential. Not only firms themselves but the markets they serve, and particularly the investment community, depend on it. Accounting data and their interpretation must be above suspicion, said Riahi-Belkaoui (1992), and to be sure of that, corporations and other users of accounting information must be certain that accountants subscribe to and practice morality set to high standards. What these standards are, and how they are deficient, distorted, and sometimes even fallacious, are the themes explored here. In doing so, the author identifies as the five aspects of accounting morality: fairness, ethics, honesty, social responsibility, and truth. The discussion begins with fairness as a concept of justice. Then the author moved to ethics in accounting, and a review of such ethical perspectives as the utilitarian, the deontological, and the notion of fittingness. He also takes up the subject of ethical codes, and asked how the accounting profession can be disciplined. The study also focused
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