Creative accounting is the use of the scope of freedom of persons who prepare financial statements, which results from the lack of appropriate patterns, standards, rules and procedures that are the basis for making decisions regarding the information creation process presented in the financial statements of enterprises, namely recognition, valuation, disclosure and information presentation.
Phenomenons in creative accounting
Creative accounting can cover four groups of phenomenons:
- creativity, which is understood as a creative element used to create financial statements. This is especially taken into account when deciding on the choice of the method of counting that will allow the report to be as reliable as possible,
- application of such techniques so that the measurement performed would be in accordance with the interest of the information producer and avoid the effects of regulation, which are in force in accounting,
- including in the financial statements such items that were not previously regulated, which entails changes in applied measurement practices,
- activities that are related to fraud, e.g. not including certain items in the reports, presenting data that is inconsistent with the actual state of affairs.
The first group of the above issues is related to the natural measurement feature, the last one concerns illegal phenomenons, i.e. the accounting scammer, so only the second and third groups are directly related to creative accounting.
The goals of creative accounting
The basic goals of creative accounting are:
- reducing losses or increasing profit,
- manipulation of indicators that are used during financial analysis,
- convincing others of their credibility, e.g. business partners, lenders, lenders,
- concealing financial risk,
- controlling the achievements of managers in order to be able to get a bonus for results,
- avoiding negative effects that may result from direct or indirect control by shareholders,
- enabling to obtain capital that would otherwise be unavailable.
Creative and aggressive and fraudulent accounting
In colloquial language, with reference to creative accounting, more and more often one can meet the terms "aggressive" and "faked", used interchangeably and treated as synonyms or as synonymous. It is a mistaken procedure, because all three terms are used in different aspects of accounting and serve to achieve different goals.
Creative accounting allows a certain freedom of choice in the area of record keeping and includes activities that remain within the law. Using, therefore, accounting tools and unlimited legal regulations of freedom, it is possible to present the financial and property situation of the company in financial reports in various ways, consistent with the concept of a reliable and true picture. This is a negative aspect of creative accounting, classifying it already for aggressive accounting.
In contrast to creative accounting, which uses the possibilities of unlimited freedoms, presents a reliable and real picture of the individual, aggressive accounting is a deliberate manipulation of financial data and misleading information recipients.
Most often, the practice of aggressive accounting is devoted to people holding managerial positions, which, in order to improve their results, embellish or distort the presented picture of the financial situation of the company. They direct accounting to artificially inflating profits, concealing financial risks and avoiding restrictions when borrowing, as well as manipulating financial indicators used in analyzes for market needs, potential investors or lenders.
Creative accounting uses the right to choose an accounting policy under applicable law, in accordance with the concept of a fair and clear picture, in order to present the image of the company in line with the assumptions set for itself by the managers.
Aggressive accounting uses the right to choose an accounting policy, the freedom of which is not limited in any way, in a way that leads to the manipulation of financial data and intended to mislead the recipients of information contained in the distorted financial statements.
Fraud accounting, on the other hand, means intentional accounting fraud, i.e. illegal activity, involving manipulation of financial data, aimed at achieving certain benefits.
- Brandt, L., Van Biesebroeck, J., & Zhang, Y. (2012). Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing. Journal of development economics, 97(2), 339-351.
- Jones, M. (Ed.). (2011). Creative accounting, fraud and international accounting scandals. John Wiley & Sons.
- Amat, O., Blake, J., & Dowds, J. (1999). The ethics of creative accounting. Economics Working Paper, 349, 715-736.