O licencima - Creative Commons https://creativecommons.org/licenses/?lang=hr CC BY-ND Ova licenca dopušta redistribuiranje, komercijalno i nekomercijalno, dokle god se djelo distribuira cjelovito i u neizmijenjenom obliku, uz isticanje Vašeg autorstva. Pogledajte sažetak licence (Commons Deed) | Pogledajte Pravni tekst licence Imenovanje-Nekomercijalno CC BY-NC Ova licenca dopušta drugima da remiksiraju, mijenjaju i prerađuju Vaše djelo u nekomercijalne svrhe. Iako njihova nova djela bazirana na Vašem moraju Vas navesti kao autora i biti nekomercijalna, ona pritom ne moraju biti licencirana pod istim uvjetima. Pogledajte sažetak licence (Commons Deed) | Pogledajte Pravni tekst licence Imenovanje-Nekomercijalno-Dijeli pod istim uvjetima CC BY-NC-SA Branka Remenarić, Ivana Kenfelja, Ivo Mijoč: Creative accounting – Motives, techniques and possibilitiesOva of prevention licenca dopušta drugima da remiksiraju, mijenjaju i prerađuju Vaše djelo u nekomercijalne svrhe, pod uvjetom da Vas navedu kao autora izvornog djela i Branka Remenarić Ivo Mijoč UDK: 657.3:343.537licenciraju svoja djela nastala na bazi Vašeg pod istim uvjetima. Zagreb School of Economics Josip Juraj Strossmayer Review article and Management University of Osijek Jordanovac 110, Faculty of Economics in Osijek Received: December 14, 2017 10000 Zagreb, Croatia Trg Ljudevita Gaja 7, Accepted for publishing: JanuaryPogledajte 19, 2018 sažetak licence (Commons Deed) | Pogledajte Pravni tekst licence [email protected] 31000 Osijek, Croatia Phone: +38512354151 [email protected] This work is licensed under a Creative Commons Attribution- Phone: +38531224415 NonCommercial-NoDerivatives 4.0 Ivana Kenfelja International License Zagreb School of Economics Imenovanje-Nekomercijalno-Bez prerada and Management CC BY-NC-ND Jordanovac 110, 10000 Zagreb, Croatia [email protected] Ovo je najrestriktivnija od naših šest osnovnih licenci – dopušta drugima da Phone: +38512354151 CREATIVE ACCOUNTING – 5 od 6 26. 06. 2017. 12:24 MOTIVES, TECHNIQUES AND POSSIBILITIES OF PREVENTION Abstract Creative accounting can be described as an accounting practice that may or may not follow the account- ing standards and principles. However, it deviates from the main idea of those standards and principles in order to present the desired picture of the business. Creative accounting is not illegal, but unethical since it doesn’t meet the main objective of financial reporting – to present fair and objective picture of the business. The practice of creative accounting usually includes overstating assets, high stocks, decreasing expenses, changes of depreciation methods, or presenting provisions as an asset. Creative accounting techniques follow the changes of accounting standards, which are modified in order to reduce financial information manipulation. However, such changes in accounting standards often result in new opportunities for ac- counting manipulation. Although entities follow the accounting standards, they also use “loopholes” to enhance key financial ratios. Therefore, it is very important to adopt measures that will prevent the abuse of creative accounting practices. The aim of the paper is to present the main motives for financial information manipulation, as well as the most common techniques, and finally the measures that have to be taken in order to minimize creative accounting practices. Keywords: Creative accounting, earnings management, accounting manipulations, financial statements 1. Introduction statements must be accurate and reliable. However, companies nowadays are increasingly resorting to Financial statements are the mirror of every com- “cooking” financial statements in order to present a pany’s business. They also represent a medium through which information on the financial posi- more attractive business image and attract as many tion and business success of a company are com- investors as possible. This is precisely why the con- municated, primarily to external interest groups, cept of creative accounting has appeared. In other which make different decisions based on such in- words, there is a distortion of financial information formation. In order to be able to make the right and presumptions of accuracy and reliability are decisions, the information contained in financial brought into question. God. XXXI, BR. 1/2018. str. 193-199 193 Branka Remenarić, Ivana Kenfelja, Ivo Mijoč: Creative accounting – Motives, techniques and possibilities of prevention Increasing competition and the economic environ- however, do not bring true economic benefits to the ment are just some of the reasons why companies company, but can instead result in great damages resort to various accounting manipulation tech- in the long term (Merchant, Rockness, 1994). Shah niques, with the aim of concealing possible losses (1998), in turn, defined creative accounting as a pro- and presenting the business in the best possible cess in which managers utilise the so-called loop- light. This does not necessarily mean that there is holes and ambiguities in accounting standards to violation of accounting standards and legal regula- demonstrate financial success in a biased manner. tions, but the so-called “loopholes” in laws are used Since creative accounting often does not violate le- to present a better image of the business. It should gal rules, the question is whether it is good or bad. be noted that the practice of creative accounting is This depends on the basic purpose for which it is not illegal – which is why auditors often neglect it, used and the manner in which it is applied. Bhasin but these are unethical procedures. (2016) describes it in a very picturesque way: crea- The aim of this paper is to analyse the results of tive accounting is like a double-edged sword – man- recent research on the topic of creative account- agement can either use it in a positive sense, or it ing and to present the main conclusions. The most can abuse it. Thus, the idea to present the business commonly used methods of creative accounting will in a better light can ultimately result in a total loss be shown, as well as possible solutions that would of company image. contribute to minimising the manipulation of finan- The use of creativity in financial reporting can be cial information and encourage companies to act in described as playing with the elements of financial accordance with basic ethical standards. statements. Doing so may result in overestimation of the value of assets, high inventory levels, reduc- 2. The concept of creative accounting tion in expenditures, changes in depreciation meth- ods, showing provisions as assets, etc. (Shahid, Ali, Accounting is one of the basic functions of each 2016). The techniques of creative accounting fol- company. The financial information that it provides is very important for both managers and decision- low the changes of accounting standards, which makers outside the company. The basic objective of are modified with the aim of reducing accounting financial reporting is to provide a fair and objective manipulation. However, well-intended changes in picture of the business to all interested stakehold- accounting standards often result in opening up of ers. This can often lead to a conflict of interest. new opportunities for accounting manipulations. Namely, on the one hand, investors expect reliable Although companies apply accounting standards, at and credible financial information so that they can the same time they use “loopholes” to enhance the make the right decisions. On the other hand are the key indicators (Karim et al., 2016). companies that, due to increasing competition and Creative accounting can have a positive impact on economic conditions, are seeking to attract inves- a company’s business in the short term, but in the tors, because of which they often resort to unethical long run it may result in decreased stock prices, methods of creative accounting, that is, manage- insolvency, and even bankruptcy. It is the root of ment of earnings. numerous accounting scandals, as well as many ac- There are various definitions of creative accounting counting reforms, which is why doubts in the trans- in the literature, but they all boil down to the same parency and honesty of financial reporting arise. idea. Bhasin (2016) describes creative accounting as For this reason, Bhasin (2016) emphasises the role an accounting practice that may (or may not) adhere of forensic accounting. Moreover, he points out that to accounting principles and standards, but deviates forensic accounting will be on the list of 20 most im- from what those principles and standards intend to portant and sought-after professions of the future. achieve, in order to present the desired business im- age. In other words, creative accounting is the pro- 3. Overview of recent research cess of transforming accounting information from Bhasin (2016) points out that many dimensions of what it actually is to what the company wants it to creative accounting have been analysed in previous be, using the benefits (or loopholes) in the existing research, but that no one has actually investigated rules or by ignoring part of the rules. what the people who prepare financial statements Creative accounting can also be described as a se- think about creative accounting, as well as their us- ries of actions initiated by the company’s manage- ers. Based on this, a survey was conducted in In- ment that affect the reported business result, which, dia, which showed that the majority of respondents 194 God. XXXI,