Annales Universitatis Apulensis Series Oeconomica, 11(1), 2009

A BRIEF REVIEW OF CREATIVE ACCOUNTING LITERATURE AND ITS

CONSEQUENCES IN PRACTICE

Diana Balaciu1
Victoria Bogdan2
Alina Beattrice Vladu3

ABSTRACT: Our research has as main objective a short review of the aspects approached at the
European level regarding the role that creative accounting plays in the life of an enterprise. In
order to achieve our goal, we have analysed approximately 40 academic articles indexed in
international database, such as Science Direct, Emerald and ProQuest. We have used a
longitudinal classification of the selected articles, studied between the years 1999 and 2009; we
have tried, also, a classification of these papers according to the most frequent debating themes.
In the end of our research, we have formulated our own conclusion,, that there is no
unanimously or unifying accepted theory at the international or European level regarding what is,
what the creative accounting represents or which are its basic principles.

Key words: creative accounting, financial scandals, financial reporting

JEL codes: M41, M14, G34

Introduction
When and why exactly this concept first appeared and what influenced its development –
these are questions that come up when opening this true Pandora’s Box: creative accounting.
With hindsight a few favourable circumstances to this concept can be identified,
circumstances first related to the economical advent of world states but at the same time to the need
of economic entities to create for themselves a good reputation in an increasingly competitive and
tough economic environment. About this particular moment, that is - the first mention, regarding
creative accounting practices, we can’t ignore the fact that the first mention belongs to the founder
of accounting - Luca Paciolo. This ambition of making figures more appealing or the opposite, if
the case, is as old as 500 years. Thus, Luca Paciolo was shaping in his already renowned De
Arithmetica, the first accounting manual, practices of creative accounting.
In the context of brisk Venetian foreign trade, relationships between traders were recorded
by double-entry bookkeeping with ink and quill-pen in main and subsidiary books. Where
discrepancies arose, the inkwell was occasionally knocked over on these books – not always
unintentionally – in order to make the entries illegible. That’s the origin of the term “cover-up”.
In the context of the world economic crisis nowadays, creative accounting will be referred to
more often as a field from where it is expected either to offer live-saving solutions or be blamed for
all the negative evolutions. On this aspect, Salustro and Leburn (2000) would say: „Crisis periods
are actually trials for entreprises; affecting their cash flow and generating risks, that accounting
doesn’t deal with in a flawless manner. Therefore, managers are tempted to resort to ingenious,
more often questionable procedures, for refining accounts presentation.”
The reality of an enterprise can be mirrored in several aspects, starting from the atmosphere
and the environment where the employees perform their daily activity, through the company’s
1
University of Oradea, Romania, dbalaciu@uoradea.ro
2
University of Oradea, Romania, vbogdan@uoradea.ro
3
Babes Bolyai University, Cluj Napoca, Romania, beattrice.vladu@econ.ubbcluj.ro

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brand and to the yearly financial statements. This reality, though, seen from the perspective of the
external environment, capitalized in clients, suppliers, public institutions, banks, investors etc, is
strongly influenced by the subjectivity of the one watching.
We will further tackle the information from the financial statements, analyzing them from
the perspective of the communication process between the two pores. The enterprise, considered as
a transmitter, through the channel of the financial statements sends the message capitalized in the
financial information to a receiver which is actually the user of this information. Until this message
gets from the information supplier to the receiver, it is influenced by perturbing factors and, once
reaching the receiver, it will be processed and understood depending on this one’s interests,
experience, state and perception, creating an image, a reality appropriated with subjective prints.
This approach of the accounting informing system may seem absurd due to the fact that the
information of the financial statements are some figures, some values which apparently cannot be
misunderstood. Yet, reading between the lines and making certain connections, several ways to
manipulate the information can be discovered.
The purpose of our article is to present the current stage of knowledge in the field of the
creative accounting. In this view, we have used, first of all, the presentation of a frame for the
understanding of the creative accounting practices, to the identification of the protagonists, of the
conditions favouring these practices and not in the least of the objectives set. In the second place,
we have reviewed, based on the specific literature, the main foreign and domestic approaches
regarding the concept of creative accounting, trying to identify and present the main collocations
used in literature to describe this phenomenon. In the third place, our scientific approach reviewed
the academic articles dealing with this subject in the last 10 years, available in scientific databases
Emerald, Science Direct and ProQuest. The paper provides, in the end, some conclusions and
suggestions for future research.

The theoretical framework proposed for the understanding of creative accounting

practices
Authors like Stolowy and Breton (2003) are among the few interested in the subject of
creative accounting daring to suggest a theoretical framework for the understanding of the
accounting manipulation practices. The fundamental principle which their theoretical framework is
based on is the following: the aim of publishing financial information is that to reduce the costs of
the enterprise projects financing. But this reduction depends on the risks to transfer the riches as
they are perceived by the agents on the market. The practical means to operate these transfers are
based on the results and the balance between the debts and share capital. Consequently, the purpose
of accounting data management is to change these two measures: the variation of the result per
share and the relation liabilities/assets. The result per share can be changed in two ways: either
adding or subtracting certain profits or expenses (which represents the change of the net result) or
transferring a column from the upstream or the downstream of the results serving as a computation
base of the result per share (which is the management through classification). Regarding the relation
between liabilities and assets, this can be modified by increasing the benefit or hiding certain
financings with the help of engagements generating devices, off the balance sheet. Figure 1
represents the theoretical framework proposed by Stolowy and Breton for the understanding of the
accounting data management.

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Potential wealth transfer

ACCOUNTS
MANIPULATION

Outside the limits of laws Within the limits of laws and

and standards standards

Fraud Return: Structural risk:

Earnings per share (EPS) Debt/equity ratio

Main
research Earnings management Creative accounting
streams (broad sense) (window dressing)

Name of the
research Earnings Income Big bath Academic Professional
stream management smoothing accounting perspective perspective

Level of Variance of Reduction EPS

Main EPS EPS of current Debt/equity
objective EPS to ratio
increase
future EPS

Many Many Few real Few real No

Type of empirical empirical empirical empirical empirical
research researches researches researches researches research.
Professional
opinion

Schipper Copeland Dye (1988) Tweedie et Griffiths

(1968) Walsh et al. Whittington (1986, 1995)
Represen- (1989) (1990) Smith (1992)
Jones Imhoff (1991)
tative (1977) Pourciau
Naser (1993) Schilit (1992)
authors (1991) Breton et Stolowy
Eckel (1981) (1993) Taffler (2000)
DeAngelo Ronen et (1995)
et al. Sadan Pierce-Brown
(1994) (1981) et Steele

Interpretations Transactions

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Figure 1. A proposed framework for understanding accounting manipulation practices

Source: H. Stolowy, G. Breton, Accounts Manipulation: A Literature Review and Proposed Conceptual Framework,
13.01.2003, pg 35

Actors, favouring conditions and objectives

In the chess parties there are many times when we consider that one of the parts has an
important advantage, even though the number of the pieces on the board is the same. To what does
this statement owe, otherwise a correct one? Obviously, it is explained through the pieces activity
difference. Seldom, during the moments of maximum confrontation of the pieces on the board, one
of the parts has more pieces “out of the game”. How can we avoid such situations? Simple, taking
into account the piece improving principle (according to the Russians, first worded out by
Makogonov) who shows that: “in balanced position, when none of the parts has immediate threats,
it is necessary to rearrange the pieces, in the worst situation, on a suitable field, or if this thing is not
possible, let’s try to change them.” Of course, there are multiple the situations when we have more
pieces out of the game. It is necessary the successive application of this principle, starting with the
strongest pieces. What we have presented above seems something absolutely ordinary, we all learn,
from first steps on the land of this magical game, that we have “to arrange the pieces on the centre
of the board, to be stronger”. This does not prevent us, that in the moments of relative “calm” on the
board, from forgetting about the application of this principle. Otherwise, subsequently, this thing
becomes already hard or impossible to achieve.
As within the framework of this “brain” game we can see the ability of the parts to use the
pieces available to them (by complying more or less with the principle worded) in order to achieve
the result proposed, thus, by extrapolating our analysis to the case of the enterprises, we can identify
certain participants who, according to the levers available to them can shape, more or less, the
image of the enterprise.
Therefore, in the life of an enterprise, two categories of actors have a special position
(Feleagă N., 2006):
(i) on one side, the shareholders, because their patrimonial rights are not exercised but in
the end, after the others, who have rights (creditors, suppliers, employees etc.) have
emphasised their debts, the shareholders take the financial risk justifying the
appropriation of a part of the year’s profit and from the residual net asset, in the case of
the entity closing down;
(ii) on the other side, the leaders, because they have privileged information, taking into
account the position held in the enterprise and, therefore, are tempted to take advantage
by allowing themselves considerable advantages or, generally, by directing the entity
towards a direction useful for them. In the case of enterprises quoted on financial
markets there is a natural distribution of responsibilities. Such a distribution and the
problems arising from it have been presented in the founding papers of Berle and Means
(1932).
The shareholders invest their capitals and give the leaders/managers a mandate through
which they manage the best the organization, trying to maximize the performance of the enterprise.
This separation of the responsibility can lead to conflicts generating costs. Manipulating accounting
data is an activity reserved to company managers, even though the other players in the field
influence the leaders/ managers in their decision to perform such a manipulation. If it were possible
to build a theory of the accounting data management, it would not have started from the techniques
used for manipulation, but based on the needs, the occasions arising and of the relations between
players and investors.
The investors can be divided in four subgroups: real and potential shareholders and the real
and potential stockholders. Their interests are very varied and the transfers of riches can be operated
between these subgroups. Consequently, they react differently to manipulating accounting data.
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Relating ourselves to the analogy with the exciting game mentioned above, we wonder to
what extent we can identify certain positive values of the creative accounting which is mentioned
quite timidly in the specific accounting literature. Therefore, being attracted to this idea, to the
extent to which we can identify such aspects, we will return…

Literature review
The concept of creative accounting is usually used to describe the process through which the
accounting professionals use their knowledge in order to manipulate the figures included in the
annual accounts. Accounting has been defined as “the art of faking a balance sheet” (Bertolus J.), “the art
of calculating the benefits” (Lignon M.), “the art of presenting a balance sheet” (Gounin L.), or “the art of
saving money” (Ledouble D.).
The creative accounting appeared in the Anglo-Saxon literature in the 1970s, most often in
the papers about the bankruptcy of enterprises and those written by Watts and Zimmerman (1978,
1986, 1990) which represent the foundation of the positive accounting theory. This research trend
made the object of several empirical works trying to explain the accounting choices starting from
the problem of the political costs that the enterprises are exposed to. More recently, Brown and
Steele (1999) have selected a portfolio of 12 accounting techniques, combining also the accounting
options with the management decisions. In addition to the political costs, it is emphasised the
importance of the activity and risk sector and that of the firm operation, as significant determinants
of the creative accounting.
According to Colasse, creative accounting is defined as a cumulus of accounting information
practices, at the limit of legitimacy, practised by some economic entities in order to beautify the
image of the financial position and the economic-financial performances. Also, Colasse states the
fact that these practices arise as a result of the normalization limits but also as a result of the fact
that the human creativity does not have limits. We retain the following remark: “it would be wrong
to believe that the regularization and the normalization present objectively the accounting portrait of
the enterprise. They reveal, explicitly, only the manner in which this portrait has been painted. On
the other side though, they leave to the account preparers a manipulation line, in the same time
indispensable and irreducible, that they can use according to the considerations deriving from the
enterprise’s financial policy or the communication policy.” (Colasse, quoted by Raybaud – Turillo
and Teller, 1996).
Almost in the same manner, Trotman (1993) defines creative accounting, appreciating that
it is a communication technique having in view the amelioration of the information provided to the
investors. Thus, the economic entity is presenting to the investors or to the prospective investors
financial statements passed through the filter of some techniques capable of generating a more
favourable image on the market but also the illusion of some more attractive results that the normal.
Defining creative accounting through a well known practice, that is “the result of
smoothing(smoothing income), Barnea, Ronen and Sadan (1976) appreciate that this makes its
presence felt each time the profits have a high fluctuation, unjustified through the economic reality.
A complex vision is provided by Naser (1993) in whose opinion, creative accounting is: “1)
the process through which, due to the existence of some breaches in the rules, accounting figures
are manipulated and, taking advantage of the flexibility, they choose those measurement practices
allowing the transformation of the synthesis documents from what they are supposed to be into
what the managers want; 2) the process through which the transactions are structured in such a
manner that it allows the “production” of the “desired accounting result.”
Some authors define creative accounting as “an assembly of procedures having in view the
change of the level of the result in order to increase or decrease, or present the financial statements,
without these objectives being reciprocally excluded” (Stolowy, 2000). For others, creative
accounting is represented by “the assembly of techniques, operations and freedom spaces provided
by the accounting texts which, without distancing from the accounting norm and strictness, allow

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the managers of an enterprise the change of the value of the result or the change of the aspect of the
accounting documents” (Gillet, quoted by Shabou and Boulila Taktak, 2002).
As a journalist, Griffiths (1986) noticed that the majority of the economic entities hide their
benefits. He appreciates that the financial statements are drawn up based on the “embellished”
registers, the resulted figures being changed in order to protect the guilty. Creative accounting is
presented as a legitimate fraud.
From practitioner’s perspective, Jameson (1988) appreciates the fact that accounting process
in its essence, requires the operation with different motivations, different ideas. From this diversity
arise manipulation, cheating and falsification at some less scrupulous accounting members. It is he
who states that these creative accounting practices do not break the law or the accounting standards,
therefore they comply with the law but not its spirit. Jameson states thus the negative character of
creative accounting which distorts the enterprise’s financial results and the position, misleading the
users of the accounting information.
From the perspective of a financial analyst, Smith (1992) considers that the highest part of
the economic growth of the ‘80s is “due” to creative accounting, that is to the accountants’ skills
than rather to a real economic growth. In the book, Accounting for Growth, he motivates the
previous idea, exemplifying the cases of some British companies which use creative accounting
practices (finding concrete proofs at 45 economic entities of great Britain), taking the example of
three companies which experienced the financial collapse shortly after they had presented their
financial statements which clearly reflected: financial stability.
Defining creative accounting, Merchant and Rockness (1994) appreciate that any action
come from the management which can distort the profits and which is not a consequence of the
economic reality, it actually represents the privilege of the financial engineering. They draw the
attention on the fact that on long term all these forced approaches can have a negative effort on the
financial stability of the economic entities.
Defining creative accounting through its practices, Shah (1996) as well as MacBarnet and
Whelan (1999) appreciate that all those financial engineering used in order to create the image
desired, the representation desired are called instruments of creative accounting. One year later,
Shah actually defines the concept of creative accounting and the emphasis is placed on the fact that
the management of the enterprise uses the legislation’s breaches or the ambiguities in order to
create their own portrait of the enterprise, according to their preferences, in other words the
financial performance is obtained through the use of the breaches in the legislation. The author
emphasises the idea that creative accounting does not break the law but only its spirit.
Creative accounting is used, according to the opinion issued by Burlacu and Pătroi (2005)
and for the “consolidation” of the economic-financial indicators of the economic entities, distorting
yet their informational content. It is appreciated that in this way the consistency and truthfulness of
the accounting information sent by the economic entity to the business environment is being altered.
Romanian literature is poor in what the interest regarding creative accounting is concerned.
Feleaga and Malciu (2002) stated that creative accounting was defined as a process through which
the accounting professionals use their knowledge in order to manipulate the figures contained in the
annual accounts.
Although there are misunderstandings regarding the definition of creative accounting, the
majority of researchers accept the idea that this stands out through two aspects. The first aspect has
in view the use of the accounting professionals’ imagination in order to translate those juridical,
economic and financial innovations for which there are no normalized accounting solutions at the
time of their occurrence. The second aspect shows the fact that the adjustments resulting from this
financial engineering are initiated according to their incidence on the enterprise’s balance sheet and
results.

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Other nomenclature of creative accounting in literature

Creative accounting, as mentioned before, has developed geographically both in its
practices’ complexity and in its nomenclature. Thus, the term preferred in the USA and the most
frequent one is that of “earnings management” whereas in Europe we are using the phrase “creative
accounting”. In the literature, creative accounting can still be found under the name of income
smoothing, earnings smoothing, cosmetic accounting or accounting cosmetics, financial crafts or
accounting crafts. For more explanations on all the various global nomenclature, we enclose the
following table:

Country The equivalent of the Romanian „creative accounting”

Switzerland Bilanzmanipulation, Bilanzkosmetik ,heisse Luft
Germany Tricksereien , Bilanzartistik, geschönte Jahresrechnung, Seifenblasen
Holland Winstegalisatie (profit equalization), Creatief boekhouden, Creatieve
jaarverslaggeving, Winststuring
(earnings management), Winstflattering, Verliesmaximalisatie
France Bricolage (DIY), Fabricated accounts, Unlimited creativity
USA Cooking the books, fabricated numbers, fiddle the numbers, more debits than
credits, earnings management
Italy Politiche di bilancio
Japan Furyo Kessan (improper accounting);
Funshoku (window-dressing), Kara-uri (dummy or “empty sales”); Mae-da-
oshi (bringing sales forward)
Australia Fudging, Manipulative accounting, Feral accounting
Great Window-dressing, Accounting for profits, Bubbles, Enronitis
Britain
(Source: Audit Committee Newsltter, KPMG, June, 2003)

By the mentioned above we pointed out the fact that creative accounting has known a global
geographical development, today being a world discussed phenomenon.

Research methodology
The object of the current article refers to the presentation of the conceptual delimitations
regarding creative accounting, the detailed description of theoretical framework proposed by some
authors, as well as the brief review of the literature written on the topic between 1999 and 2009.
Also, we can see how the specific literature regarding the aspects concerning the magical land of
creative accounting becomes day by day even richer, not little guilty by this thing being the
financial scandals and the recent economic crisis we are experiencing (are we going to get over it?)
we have decided to shortly review the main aspects approached at the European level regarding the
role that creative accounting is playing in this “play”. To achieve this aim, we analysed
approximately 40 academic articles available in three scientific databases, Science Direct, Emerald
and ProQuest. The choice of these three sources is motivated by the presence hereof all the articles
having in view a very good quality international research and the English language to present them.
Our approach regarding the exploratory research includes two stages:
The first consists in finding the information about creative accounting in the databases
mentioned above the longitudinal classification of the selected articles – the interval had in mind
being contained between 1999 and 2009.
The second stage consisted in grouping them on the most frequently approached themes.
Out of these, we mention aspects connected to different accounting techniques/practices in the
context of some bankruptcies, by their influence on the financial markets transactions and aspects
connected to the problems of audit and corporative governance.
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In our research, we have used the deductive method (the attainment of the conclusions based
on the already existing theories), the type of research used being the fundamental one. The utility of
such a research contributes to the ensurance of the premises for the development of future research.

Discussion
The main interest areas around which we have tried to “embroider” are therefore presented
in detail next:
Bankruptcies
The spectacular rise and fall of Enron Co. provides a truthful illustration of the fact that
some companies can use the juridical status of transactions to hide the economic substance
representing the base of these transactions. Baker and Hayes(2004) examine the creative accounting
practices connected to:
1. Off balance sheet financing
2. Acknowledgement of profits
3. Information regarding the financial statements re
Based on these three directions, the article examines the GAAP’s requirements and the ways
through which Enron used these GAAPs to hide the economic substance representing the base of
the transactions. If the economic principle on the judicial had been applied in the case of Enron Co.,
the investors and creditors would have been provided with a realistic image of the financial position
and results, probably avoiding what subsequently has become the most famous bankruptcy case in
the USA history. Remaining on the sphere of serious accounting scandals within the big companies
(for example, World Com and Enron) and in the banking sector (for example BCCI, Barings, Allied
Irish Bank and Baninter), Mine Omurgonulsen, Ugur Omurgonulsen (2009) brings into discussion
the problem of creative accounting with its legal and illegal facets which occurred on the companies
and governments’ agenda. They examine a certain type of creative accounting practice (fraud) in
the light of a Turkish case (the ImarBank scandal). It has been discovered that the deficiencies
within the legal banking conceptual framework, the inadvertencies of the regulating and supervision
governmental bodies, practical difficulties in the application of the ethical rules and of the
legislation which have led to the wrong operation of the judicial system, are significant reasons for
creative accounting practice in connection with the Imarbank owners and top management’s greed.
Also, the intention and capacity of the political power in fighting against this type of corruption are
crucial. The authors also deal with the different techniques of creative accounting found in practice,
the review of a series of illegal transactions discovered at Imarbank and the reasons for which the
public authority has failed in preventing the Imarbank scandal.
Creative accounting is the root of numerous accounting scandals. It represents the
transformation of the accounting figures from what they are in accordance to the economic reality
into what the managers want using the advantages of the existing regulations and/or ignoring some
of them. The impact of the creative or fraudulent accounting can be reduced by making the
accounting and the audit system more efficient but also through an efficient corporative governance.
Audit
Even though there are numerous articles in the specific accounting literature regarding the
theme of creative accounting, tackling the creative accounting techniques such as “window
dressing” and off balance sheet financing, there is little known about the frequency with which the
companies use these techniques. In this view, Naser & Pendlebury (1992) tackle the results of the
application of a questionnaire to the experienced auditors who have been asked to express their
opinion concerning creative accounting. The auditors have been asked to indicate the frequency
with which they met creative accounting techniques and their answers have been analysed
according to: the type of companies, the industrial classification and creative accounting practices.
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The auditors’ perception regarding the reasons for which the companies use creative accounting and
the steps that must be followed in order to eliminate creative accounting are also analysed by the
authors.
The accounting standards are created and implemented in order to standardise the
accounting practice, they containing definitions of the accounting concepts whose function is to
guide the professional reasoning. The professional reasoning has a major impact on the creation of
the financial statements because the subjectivity and the freedom of action can lead to the
manipulation of the profits. Hronsky şi Houghton (2001) identify the decisions made by the auditors
within the legislative changes, analysing the accuracy of the professional reasoning within the
legislative changes.
An empirical study proposed by Caramanis and Lennox (2008) investigates the impact of
the audit mission efforts on the managerial earnings using a unique database which contains the
hours worked by the auditors made within 9738 audit works in Greece in the companies audited
between 1994-2002. It has been noticed that in the case of audit works where the number of hours is
small the audited companies have the tendencies to manipulate more the managerial earnings
therefore the reduced effort for the audit works increases the possibility that the managers report
manipulated profits.
A factor of the weak conformity with the accounting standards seems to be the low quality
of the audit trials. Falkman and Tagesson (2008) describe and explain the impact of the legislation
and standardization on the municipal accounting in Sweden under the spectre of positive theory of
accounting. The regularization of the municipal accounting in Sweden represented the object of
fundamental researches in the last decades. The municipal accounting was regulated by law starting
with January 1st 1998. The main purpose of the accounting reform in Sweden was that to suppress
the creative accounting and increase the level of harmonization and comparability.
The data collected have been obtained through the documentary study, questionnaire and
interviews. The final results showed that the reform had a limited impact on the accounting
practices and the conformity with the accounting standards was made at a low level. Also, the study
showed that there were major perception differences among the financial statements preparers.
Governance
The great Britain example illustrates as well as possible the problems which can be
associated with the property separation and the enterprise control, dealing with several aspects
involved by the agency’s theory. Such problems connected to the agency, as it has been
demonstrated above, often include the managers’ asset abuse and the lack of a real control. Yet, as
in other countries, the development of the corporative governance in Great Britain has initially led
to enterprise collapses and financial scandals. As a result of these (Coloroll and Polly Peak, etc. )
and of the lack of trust in the financial reporting of several British enterprises, the Financial
Reporting Council, the London Stock Exchange and the accounting profession launched in May
1991 the idea of creating a committee regarding the corporative governance financial aspects
(Feleagă, 2008). After the committee was created, there were the scandals of the BCCI and
Maxwell enterprises. The Cadbury report was drawn up between May 1991 and the end of 1992,
through the committee with the same name, due to Sir Adrian Cadbury. The central report is built
by what the authors call a code regarding the best practices. They pretend that, if such a code had
existed in the past, the recent unexpected bankruptcy examples and the fraud cases would have been
disclosed much earlier.
Peasnell et all. (2000) using a constant group analyse the correlation between the structure of
the Board of Directors and the managerial earnings comparing two periods of time: the period
before the appearance of the Codes of Good Practice written by the Cadbury Committee1994 and
the period after the appearance of the Code of Good Practices. They conclude that after the
appearance of the Code of Good Practices the managerial earnings diminished, given the new

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management structure proposed by the Code.

The relation between the corporative governance and the Parmalat bankruptcy is dealt with
by Buchanan and Yang (2005). At the base of the Parmalat company failure is the conflict of
interests between founding chairman (majority shareholder) and the minority shareholders, a
conflict rooted in a corporative governance based on an opportunist behaviour favouring the
majority shareholder against the minority shareholder. The development of creative accounting in
this context is connected to the failure of the regulating bodies regarding the corporative
governance, as well as the auditors and financial institutions’ lack of vigilance.
The problem of the profit manipulation has been studied through the accounting positivist
theory. The weaknesses characterising the results obtained appeared due to the fact that the different
theoretical and methodological approaches through which this subject was studied. In France, the
management plays a central role in manipulating the profit. Using the results of 32 interviews
organized in 13 companies, Lambert and Sponem (2005) argue that the spread of the Anglo-Saxon
model of corporative governance promoted this behaviour. Far from the opportunism hypotheses
worded out by the positivist accounting theory, profit manipulation is a tool through which the
management wants to get large legitimacy within the organizations and/or adopt what they pretend
to be ethical behaviour. They also tackle the pressure come from the investors in direct relation to
the profit manipulation, the profit manipulation seen as an ethical act as well as the role of the
accounting information in the Anglo-Saxon model of corporative governance.
Financial Markets
There are significant proofs of the use of creative accounting by the big companies listed.
Yet, little is known about the process through which such practices are drawn up and manage to
flinch the regulations and legal sanctions. Atul K. Shah (1996) examines the process of a creative
conformity in the case of convertible bond issuing by the companies quoted on the Stock Exchange
in Great Britain during 1987-1990. There has been an active dialectic on the creativity used in
creating these instruments, an attempt to break the laws in order to break them again. The results
show that a small group of professionals from the finance, law and accounting fields have
collaborated to draw up these instruments. They helped the issuers to manage the financial reporting
process in such a way that the conformity is ensured. Where the contributors have the capacity to
use such “creative conformities” referring to the resources and abilities they have, the regulating
bodies are confronting themselves with irregularities coming from their own “yard”.
An empirical study developed by Kinnunen et all. (2000) in Finland, shows the fact that the
firms issuing shares for high discounts use this escape door in order to manipulate the financial
information comparing to those providing reduced discounts for the shares or the firms which do
not issue shares. The managerial policy has in view the use of these manipulated earnings for the
subsequent granting of dividends to the shareholders, coming up to the investors’ expectations
regarding the company’s ability to pay its dividends. The flexibility in selecting the accounting
models sometimes motivates the managers to choose between the accounting options or simply to
change those that they have already used due to the desire to raise the final result, that is to
manipulate the result. Therefore, the manipulating behaviours in the Turkish companies quoted on
the Stock Exchange are detected by Atik (2009) using empirical tests, tests tackling discretionary
accounting changes (DAC). Parallel with the study performed by Moses, quoted the above
mentioned author, the result smoothing is accepted as one of the motivations for DAC and the
group of firms is divided into two: manipulating and non-manipulating, based on Moses’
manipulating behaviour index. The results show as possible motivations for DAC: the result
smoothing, the economic characteristic when DAC are made and the Turkish firms’ desire to have
profits aiming at zero.

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The Public Sector

Benito et all. (2008) analyze a few private financing proposals in the public sector which
took place in recent year Spain. They demonstrate that the new financing methods incorrectly
evaluated as being private, have been made in the end by the government from the budgetary
resources. A postponing of the budgetary acknowledgement of some transactions accompanied by a
wrong information on the debts presented in the financial statements afferent to projects are the
main consequences of the use of the new financing methods. Shortly, this is a clear example of
creative accounting used in order to positively respond to the convergence criterion imposed by the
EU.
Traditionally, the financial balance of the economic entities in the public sector was
determined based on the balance budgets and treasury budgets. Even from 1990 the superiority of
the accrual basis of accounting used in the context of public sector was emphasised both by
practitioners as well as by the academicians. Vinnari and Nasi (2008) demonstrate that the accrual
basis of accounting provides opportunities to use creative accounting or the managerial earnings in
the public sector, at least as long as the accounting is held according to the national regulations
rather than to IAS/IFRS.
Financial Reporting
According to Barlev & Haddad (2003), the relevance of the financial statements must be
measured by reporting to the:
− association between the market and the estimated profits
− contribution of the administration function
− reduction of the agency’s costs
− streamline of the management
− supply of relevant information to the stakeholders.
Also, the development and improvement of the accounting standards reveal the fact that the
historical cost is gradually replaced by the fair value. The fair value (FVA) in contrast to the
historical cost hiding the real financial position and the profit, represents a relevant value (according
to the same authors). The reporting based on FVA draw the shareholders’ attention on the capital
value and streamline the administrative function. The managers are asked to watch the value of the
shareholders’ capital. The fair value (FVA) ensures a complete information, compatible with the
reality and transparent. The application of the FVA opens up the way to the volatility of earnings
and managerial earnings in relation to the application of the historical cost (HCA).
Other authors, Markarian & Pozza (2008), based on empirical researches referring to
motivational factors of the earning manipulation in the firms with majority family capital,
investigate the conflict of interests occurred from the agency’s theory and word out hypotheses
assuming that those firms are less sensible to the motivations of the result smoothing than the firms
with a non-family capital. The research hypotheses are focused on the problem of costs capitalizing
the development costs.

Conclusions
Our paper deals with conceptual and motivational aspects of the appearance and
development of creative accounting practices. The concept of creative accounting is analysed in its
evolution, from the first definitions found in the specific literature to the contemporary modern
approaches connecting this concept implicitly to cultural, political or even psychological aspects.
To understand the meanings of the concept mentioned, our study describes in detail a theoretical
framework proposed by some authors but also the objectives of the accounting figure manipulation.
Also, there are descriptions of the actors of this “game” of creative accounting, of the conditions
generating different accounting manipulation practices and not in the least the “manipulation”

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intentions of the enterprise managers. A distinct part of our study has in concern a short review of
the main aspects tackled with at the European level in the specific literature regarding the role
played by creative accounting in the life of an enterprise. To achieve this objective, we have
analysed approximately 40 academic articles available in three scientific databases, Science Direct,
Emerald and ProQuest. We have used a longitudinal classification of the articles selected – the
interval had in view being 1999-2009 – also trying to group them according to the most frequently
tackled with subjects.
In the end of our research, we may conclude that there is no unanimously accepted theory at
the international or European level concerning what is, what creative accounting represents or
which are it basic principles. Also, we retain the attention on some controversial aspects attachable
to this subject such as the negative values versus the positive values of the creative accounting.
Being aware of the limitations of our research, we will concentrate our efforts on a more
deepened analysis of the famous cases of creative accounting and fraud and on the other
circumstances which it is never known when they might give birth to some manipulations in order
to distort the real image of the enterprises’ financial statements. For this, the study of literature must
be more ample in time and space and it should clearly emphasise the areas uncovered by the
existing literature in order to see which elements are worth studying with propensity.

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Investing in people! PhD scholarship, Project co-financed by the European Social Fund, SECTORAL
OPERATIONAL PROGRAMME HUMAN RESOURCES DEVELOPMENT 2007 – 2013
Babeş-Bolyai University, Cluj-Napoca, Romania

FONDUL SOCIAL EUROPEAN MINISTERUL EDUCAŢIEI,

Proiect finanţat de MINISTERUL MUNCII, FAMILIEI ŞI INSTRUMENTE STRUCTURALE UNIVERSITATEA BABEŞ-BOLYAI
POSDRU CERCETĂRII ŞI INOVĂRII
UNIUNEA EUROPEANĂ PROTECŢIEI SOCIALE 2007-2013 CLUJ-NAPOCA
2007-2013 OIPOSDRU
AMPOSDRU

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