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    Creative Accounting

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    Radhakrishna Mishra
    Creative accounting refers to accounting techniques used to misrepresent the actual financial performance or position of a company. It can involve deliberately smoothing earnings, managing earnings, or exploiting loopholes in accounting rules to mislead investors or regulators. The objectives are typically to meet targets, minimize tax obligations, or conceal insolvency. However, creative accounting ultimately undermines investor trust and can damage companies in the long-run when the truth is revealed. Common techniques include misusing reserves, premature revenue recognition, and round-tripping transactions between colluding firms.

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    Creative Accounting

    Uploaded by

    Radhakrishna Mishra
    437 views8 pages
    Creative accounting refers to accounting techniques used to misrepresent the actual financial performance or position of a company. It can involve deliberately smoothing earnings, managing earnings, or exploiting loopholes in accounting rules to mislead investors or regulators. The objectives are typically to meet targets, minimize tax obligations, or conceal insolvency. However, creative accounting ultimately undermines investor trust and can damage companies in the long-run when the truth is revealed. Common techniques include misusing reserves, premature revenue recognition, and round-tripping transactions between colluding firms.

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    Creative accounting refers to accounting techniques used to misrepresent the actual financial performance or position of a company. It can involve deliberately smoothing earnings, managing earnings, or exploiting loopholes in accounting rules to mislead investors or regulators. The objectives are typically to meet targets, minimize tax obligations, or conceal insolvency. However, creative accounting ultimately undermines investor trust and can damage companies in the long-run when the truth is revealed. Common techniques include misusing reserves, premature revenue recognition, and round-tripping transactions between colluding firms.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    437 views8 pages

    Creative Accounting

    Uploaded by

    Radhakrishna Mishra
    Creative accounting refers to accounting techniques used to misrepresent the actual financial performance or position of a company. It can involve deliberately smoothing earnings, managing earnings, or exploiting loopholes in accounting rules to mislead investors or regulators. The objectives are typically to meet targets, minimize tax obligations, or conceal insolvency. However, creative accounting ultimately undermines investor trust and can damage companies in the long-run when the truth is revealed. Common techniques include misusing reserves, premature revenue recognition, and round-tripping transactions between colluding firms.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 8

    CREATIVE ACCOUNTING

    Meaning
    Creative accounting is the technique which is
    commonly used to conceal corporate fraud
    within the boundary of accounting principles.
    Creative accounting is referred to also as
    income smoothing, earnings management,
    earnings smoothing, financial engineering and
    cosmetic accounting in USA.
    Creative accounting in Europe
    Definition
    Is the deliberate dampening of fluctuations
    about some level of earnings considered to be
    normal for the firm. (Barnea et al. 1976)
    Is any action on the part of management
    which affects reported income and which
    provides no true economic advantage to the
    organization and may in fact, in the long-term,
    be detrimental. (Merchant and Rockness,
    1994)
    Definition .. Contd

    Creative accounting is the transformation of


    financial accounting figures from what they
    actually are to what preparers desire by taking
    advantage of the existing rules and/or
    ignoring some or all of them. (Kamal Naser)
    Objectives of creative accounting
    To Keep the companys financial results within
    agreed limits set by creditors;
    To fulfill public listing requirements;
    To help negotiations with regulators;
    To pay less tax; and
    To push the company towards insolvency.
    Limitations of Creative Accounting
    Difficulty for investors to distinguish between
    the fair and unfair statements.
    Do not always offer a detailed picture of the
    financial positions and performance
    It can impress the investors only over short-
    time periods while the financial position goes
    worse this becomes useless
    Distrust of the investors conducted by the
    collapse of companies
    Techniques of Creative Accounting
    Big bath charges: Conservative estimates
    about inventory. Can be used at bad times
    Creative Acquisition Accounting: Allocate a
    large portion of an acquisition price as in
    process. E.g. R & D
    Cookie jar Reserve: Unrealistic assumptions
    when calculating estimates for sales returns,
    loan losses or warranty costs.
    Techniques . Cont.
    Materiality: Intentionally records errors within
    a defined percentage ceiling.
    Revenue Recognition: Increase their earnings
    by recognizing a sale prior to the completion
    of that sale.
    Round-Trip Techniques: Increase the volume
    of transactions through buying and selling
    products simultaneously between companies
    working together

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