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WIKIBOOKS
DISPONIBILI
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ART
- Great Painters
BUSINESS&LAW
- Accounting
- Fundamentals of Law
- Marketing
- Shorthand
CARS
- Concept Cars
GAMES&SPORT
- Videogames
- The World of Sports

COMPUTER TECHNOLOGY
- Blogs
- Free Software
- Google
- My Computer

- PHP Language and Applications
- Wikipedia
- Windows Vista

EDUCATION
- Education
LITERATURE
- Masterpieces of English Literature
LINGUISTICS
- American English

- English Dictionaries
- The English Language

MEDICINE
- Medical Emergencies
- The Theory of Memory
MUSIC&DANCE
- The Beatles
- Dances
- Microphones
- Musical Notation
- Music Instruments
SCIENCE
- Batteries
- Nanotechnology
LIFESTYLE
- Cosmetics
- Diets
- Vegetarianism and Veganism
TRADITIONS
- Christmas Traditions
NATURE
- Animals

- Fruits And Vegetables


ARTICLES IN THE BOOK

  1. Account
  2. Accountancy
  3. Accountant
  4. Accounting cycle
  5. Accounting equation
  6. Accounting methods
  7. Accounting reform
  8. Accounting software
  9. Accounts payable
  10. Accounts receivable
  11. Accrual
  12. Adjusted basis
  13. Adjusting entries
  14. Advertising
  15. Amortization
  16. Amortization schedule
  17. Annual report
  18. Appreciation
  19. Asset
  20. Assets turnover
  21. Audit
  22. Auditor's report
  23. Bad debt
  24. Balance
  25. Balance Sheet
  26. Banking
  27. Bank reconciliation
  28. Bankruptcy
  29. Big 4 accountancy firm
  30. Bond
  31. Bookkeeping
  32. Book value
  33. British qualified accountants
  34. Business
  35. Business process overhead
  36. Capital asset
  37. Capital goods
  38. Capital structure
  39. Cash
  40. Cash flow
  41. Cash flow statement
  42. Certified Management Accountant
  43. Certified Public Accountant
  44. Chartered Accountant
  45. Chartered Cost Accountant
  46. Chart of accounts
  47. Common stock
  48. Comprehensive income
  49. Consolidation
  50. Construction in Progress
  51. Corporation
  52. Cost
  53. Cost accounting
  54. Cost of goods sold
  55. Creative accounting
  56. Credit
  57. Creditor
  58. Creditworthiness
  59. Current assets
  60. Current liabilities
  61. Debentures
  62. Debits and Credits
  63. Debt
  64. Debtor
  65. Default
  66. Deferral
  67. Deferred tax
  68. Deficit
  69. Deloitte Touche Tohmatsu
  70. Depreciation
  71. Direct tax
  72. Dividend
  73. Double-entry bookkeeping system
  74. Earnings before interest and taxes
  75. Earnings Before Interest, Taxes and Depreciation
  76. Earnings before Interest, Taxes, Depreciation and Amortization
  77. Engagement Letter
  78. Equity
  79. Ernst a& Young
  80. Expense
  81. Fair market value
  82. FIFO and LIFO accounting
  83. Finance
  84. Financial accounting
  85. Financial audit
  86. Financial statements
  87. Financial transaction
  88. Fiscal year
  89. Fixed assets
  90. Fixed assets management
  91. Fixed Assets Register
  92. Forensic accounting
  93. Freight expense
  94. Fund Accounting
  95. Furniture
  96. General journal
  97. General ledger
  98. Generally Accepted Accounting Principles
  99. Going concern
  100. Goodwill
  101. Governmental accounting
  102. Gross income
  103. Gross margin
  104. Gross profit
  105. Gross sales
  106. Historical cost
  107. Hollywood accounting
  108. Imprest system
  109. Income
  110. Income tax
  111. Indirect tax
  112. Insurance
  113. Intangible asset
  114. Interest
  115. Internal Revenue Code
  116. International Accounting Standards
  117. Inventory
  118. Investment
  119. Invoice
  120. Itemized deduction
  121. KPMG
  122. Ledger
  123. Lender
  124. Leveraged buyout
  125. Liability
  126. Licence
  127. Lien
  128. Liquid asset
  129. Long-term assets
  130. Long-term liabilities
  131. Management accounting
  132. Matching principle
  133. Mortgage
  134. Net Income
  135. Net profit
  136. Notes to the Financial Statements
  137. Office equipment
  138. Operating cash flow
  139. Operating expense
  140. Operating expenses
  141. Ownership equity
  142. Patent
  143. Payroll
  144. Pay stub
  145. Petty cash
  146. Preferred stock
  147. PricewaterhouseCoopers
  148. Profit
  149. Profit and loss account
  150. Pro forma
  151. Purchase ledger
  152. Reserve
  153. Retained earnings
  154. Revaluation of fixed assets
  155. Revenue
  156. Revenue recognition
  157. Royalties
  158. Salary
  159. Sales ledger
  160. Sales tax
  161. Salvage value
  162. Shareholder
  163. Shareholder's equity
  164. Single-entry accounting system
  165. Spreadsheet
  166. Stakeholder
  167. Standard accounting practice
  168. Statement of retained earnings
  169. Stock
  170. Stockholders' deficit
  171. Stock option
  172. Stock split
  173. Sunk cost
  174. Suspense account
  175. Tax bracket
  176. Taxes
  177. Tax expense
  178. Throughput accounting
  179. Trade credit
  180. Treasury stock
  181. Trial balance
  182. UK generally accepted accounting principles
  183. United States
  184. Value added tax
  185. Value Based Accounting Standards and Principles
  186. Write-off
 



ACCOUNTING
This article is from:
http://en.wikipedia.org/wiki/Creative_accounting

All text is available under the terms of the GNU Free Documentation License: http://en.wikipedia.org/wiki/Wikipedia:Text_of_the_GNU_Free_Documentation_License 

Creative accounting

From Wikipedia, the free encyclopedia

 

Creative accounting and earnings management are euphemisms referring to accounting practices that may or may not follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities. The terms "innovative" or "aggressive" are also sometimes used.

The term as generally understood refers to systematic misrepresentation of the true income and assets of corporations or other organizations. "Creative accounting" is at the root of a number of accounting scandals, and many proposals for accounting reform - usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added.

Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of accounting irregularities at the Enron, Worldcom, and other business entities in the United States.

One commonly accepted incentive for the systemic over-reporting of corporate income which came to light in 2002 was the granting of stock options as part of executive compensation packages. Since stock prices reflect earning reports, stock options could be most profitably exercised when income is exaggerated, and the stock can be sold at an inflated profit.

The most notable activist is Abraham Briloff (professor emeritus of CUNY Baruch) who for years wrote a column for Barron's that constantly analyzed breaches of ethics and audit professionalism among CPA firms. His most famous book is called Unaccountable Accounting. The profession, in turn, was not kind to Dr. Briloff [1] but much of what he advocated has been forced on the industry in the wake of the Enron scandal (See Sarbanes-Oxley).

A lesser usage is in professional humor, when accountants poke fun at each other's more esoteric accountancy practices.

According to critic David Ehrenstein, the term "Creative Accounting" was first used in 1968 in the film The Producers by Mel Brooks. [2]

Creative accounting tactics

  • Although not technically wrong, many annual and quarterly reports and presentations dive heavily into theoretical scenarios where "one-time charges" to earnings are excluded. What this means is for example, a law suit settlement amount would be taken out of the reported profit in one big chunk, even if it is paid out little by little over time (this practice is called reserving). Often, when explaining the quarterly results, a CEO might say "Well if we didn't take this charge for the law suit, we would have made this much money". Very often, the hypothetical situations proposed get even more complicated. The main "creative" aspect to this is when a "one time" "exceptional" charge really is something that is very common to the business.
  • Banks are able to lend out most of the money they receive in deposit (they also can lend money they borrow from other banks). However, to protect against bad loans, banks must keep aside a supply of money called a "reserve". The bank, within general guidelines, gets to set the size of this reserve to what it feels is prudent compared to how risky its outstanding loans are. However, when the bank wants to make it look like it made more money this quarter than last, one way to do that is to take money from the reserve and call it profit with the excuse that the loans are safer now than before and that amount was no longer needed.
  • One of the main genres of "creative accounting" is known as slush fund accounting, whereby some earnings from this quarter are hidden away just in case the profit from next quarter is not enough for the management to make their bonuses. This happened most famously at Freddie Mac. As of 2004 there is a large investigation underway to see if retroactive insurance policies from insurers such as General Re of Berkshire Hathaway were used for slush fund accounting. The question is if these insurance policies truly transferred some risk or were merely a slush fund.
  • Creative accounting is not limited to large firms with banks of accountants. Smaller companies often use creative accounting, but for tax saving purposes rather than meeting bonuses or shareholder expectations. Salaries are sometimes included in profits to benefit from corporation tax rates being lower than personal tax rates and spouses are sometimes put on the books as employees though they may never have worked for the company. As smaller companies are generally subject to less onerous rules - and many of them fall below the limit required for a full annual audit every year - much of the creative accounting in this sector does not get a lot of publicity.

Earnings Management

According to Healy and Wahlen (1999), "Earnings Management" occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or to influence contractual outcomes that depend on reported accounting numbers.

Earnings management usually involves the artificial increase (or decrease) of revenues, profits, or earnings per share figures through aggressive accounting tactics. Aggressive earnings management is a form of fraud and differs from reporting error.

Management wishing to show earnings at a certain level or following a certain pattern seek loopholes in financial reporting standards that allow them to adjust the numbers as far as is practicable to achieve their desired aim or to satisfy projections by financial analysts. These adjustments amount to fraudulent financial reporting when they fall 'outside the bounds of acceptable accounting practice'. Drivers for such behaviour include market expectations, personal realisation of a bonus, and maintenance of position within a market sector. In most cases conformance to acceptable accounting practices is a matter of personal integrity. Aggressive earnings management becomes more probable when a company is affected by a downturn in business.

Earnings management is seen as a pressing issue in current accounting practice. Part of the difficulty lies in the accepted recognition that there is no such thing as a single 'right' earnings figure and that it is possible for legitimate business practices to develop into unacceptable financial reporting.

It is relatively easy for an auditor to detect error but earnings management can involve sophisticated fraud that is covert. The requirement for management to assert that the accounts have been prepared properly offers no protection where those managers have already entered into conscious deceit and fraud. Auditors need to distinguish fraud from error by identifying the presence of intention.

The main forms of earnings management are as follows:

  • unsuitable revenue recognition
  • inappropriate accruals and estimates of liabilities
  • excessive provisions and generous reserve accounting
  • intentional minor breaches of financial reporting requirements that aggregate to a material breach.

References

Healy, P. M. and J. M. Wahlen. 'A review of the earnings management literature and its implications for standard setting', Accounting Horizons, December 1999, pp. 365-383.

Further reading

  • How Companies Lie: Why Enron Is Just the Tip of the Iceberg, A. Larry Elliott, Larry Elliott, Richard Joseph Schroth, Random House, 2002, Hardback, ISBN 0-609-61081-3
  • Lawrence A. Cunningham, The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Might Just Work)

See also

  • Corporate abuse

External links

  • Salary non-disclosure - Masking costs to show higher profit
  • The ethics of creative accounting
Retrieved from "http://en.wikipedia.org/wiki/Creative_accounting"
 

 

 

  

 

 


 

 
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