Accounting Term Paper

ABSTRACT
An entitys true and fair view is reflected according to its financial position, its financial
performance and its changes accordingly. This study is based on creative accounting, and how
companies apply to determine or influence the entitys financial position and performance in
the capital market.
In order to do so, I shall look into:

The definition of creative accounting

Consider the various ways in which creative accounting can be undertaken
CMC Motors Kenya scandal of manipulated accounts

INTRODUCTION
Creative accounting has been defined in a number of ways over the years. However, from an
academic perspective, it is defined as 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 them1. Therefore even after the IASs and IFRSs standards and
recommended practices, audit by external companies, or the implementation of accounting
regulation the scope of creative accounting still remains prevalent, regardless of its deceitful
nature.
Creative accounting methods can be categorized into the following:

Accounting rules which allow a company to choose between different accounting

methods. Hence, the company chooses an accounting policy that gives the preferred
image they are looking for.

1 Naser, K. (1993) Creative Financial Accounting: Its Nature and Use, Hemel Hempstead:
Prentice Hall.

Accounting Term Paper

Some entries in the accounts may involve an unavoidable degree of estimation,

judgement, and prediction therefore, the creative accountant has the opportunity to

scale towards the side of caution or optimism in making the estimate.

Entering into artificial transactions to manipulate balance sheet amounts as well as to
move profits between accounting periods by entering into two or more related

transactions with an obliging third party, such as a bank or SACCO.

Timing genuine transactions so as to give the desired impression in the accounts. For
example, suppose a business has an investment of Ksh.1 million at historic cost which
can easily be sold for Ksh.3 million, being the current value. The managers of the
business are free to choose in which year they sell the investment and so increase the
profit in the accounts.2

CMC MOTORS CASE STUDY

CMC Motors Kenya, a subsidiary of CMC Holdings, is a leading player in the East African
motor industry with exclusive distribution of Ford, Mazda, and Suzuki vehicles. 3
Unfortunately, in September, 2011 a major warfare broke out at the companys revelation that
some members of the board of directors had been fleecing the company and stashing the
money in foreign accounts. During the investigation process, it came to light that all
commission incomes from 1977 to 2013 were adjusted to price inflations and wired to secret
accounts in Jersey. The payments were described as salary top-ups and paid twice a year in
sterling pounds.4 The chief executive at the time, Bill Lay, very disturbed with the bottom line

2 Amat, O., Blake, J. and Dowds, J (1999), THE ETHICS OF CREATIVE ACCOUNTING.
http://core.ac.uk/download/files/153/6475312.pdf (visited January 4, 2016)
3
About us: CMC MOTORS GROUP LTD. http://www.cmcmotors.com/kenya/about/
(visited January 4, 2016)
4
http://www.nation.co.ke/news/Charles-Njonjo-Joshua-Kulei-CMCHoldings/-/1056/2444108/-/91bj0k/-/index.html (visited January 4, 2016)

Accounting Term Paper

results of the company put the blame on the board members who had engaged in unnecessary
expenditures and massive illegal dealings that hampered the growth of the company. An audit
of the companys operations showed that ousted chairman, Peter Muthoka used his company
Andy Freight Forwarders to offer CMC Motors logistics services and went ahead to
overcharge the company for a period of 12 months, leading CMC to pay Ksh1.1 billion to
Andy Freight for logistics services.5
Due to the fraud of CMCs accounts, the Capital Markets Authority6 filed a formal complaint
with the Institute of Certified Public Accountants of Kenya (ICPAK) accusing Deloitte of
mishandling CMCs financial statements through misstating the auto dealers accounts,
thereby inflating its earnings. Deloitte was also accused of not recognising losses from CMCs
assets that are damaged, as well as failing to disclose in the annual reports the auto firms
subsidiary in South Sudan, and abetting the booking of undelivered vehicle sales as revenues
and not capturing interest payments for cars sold on credit. In its defence, Deloitte claimed
that CMCs directors and board intentionally presented falsified documents that the audit firm
used as the basis of its opinions7 therefore it was not possible for them to detect the fraud.
5
Njiraini, J., Aron, M (2011), Two CMC board of directors accused of
fraud.http://www.standardmedia.co.ke/article/2000042827/two-cmc-board-of-directorsaccused-of-fraud (visited January 4, 2016)

6
The Capital Markets Authority established by the Capital Markets Act, CAP 485A,
implements a regulatory framework which the players in the industry need to
adhere to in the course of offering their services. The Authority strives to deepen
and broaden the capital markets by developing a regulatory framework that
facilitates the development of new financial products and institutions through
research and ensuring fairness and orderliness in the capital markets industry.
7
Business Daily (2012), Deloitte blames CMC bosses for audit woes.
http://www.businessdailyafrica.com/Corporate-News/Deloitte-blames-CMC-bossesfor-audit-woes----/-/539550/1368956/-/item/0/-/132wj0v/-/index.html (visited
January 4, 2016)

Accounting Term Paper

CONCLUSION
In conclusion, CMC Motors engaged in creative accounting through manipulating their books
of accounts through income smoothing to smooth out results to give an impression of stability
and sustainability to their shareholders and the market at large, yet that was not the case.
Seeing as creative accounting is common practice, it deceives shareholder of a companys
financial position in the market just like CMC did. In order to curb the practice, a companys
accounting policy should ensure that it adheres to rightful accounting principles as well as
reduce the scope of accounting methods used. In addition, prudence should be applied in
transactions that are uncertain and require the use of professional judgement.
Creative accounting is accounting manipulation because it aims to achieve desired results in
the short run and injures the ultimate goal of increasing a companys stock value.
Furthermore, it is not a one-time activity, once it is applied the company has to continue with
the process in order to keep the accounts balanced. This is harmful to shareholders who rely
on this information to make decisions, as it is false. It is not justifiable, and thus an unethical
practice.

References
Amat, O., Blake, J., & Dowds, J. (1999, December). THE ETHICS OF CREATIVE
ACCOUNTING. Retrieved from
http://core.ac.uk/download/files/153/6475312.pdf
CMC MOTORS GROUP LTD. (2016, January 4). Retrieved from CMC MOTORS
GROUP LTD. Web site: http://www.cmcmotors.com/kenya/about/
Deloitte blames CMC bosses for audit woes. (2012, March 18). Business Daily.
Naser, K. (1993). Creative Financial Accounting: Its Nature and Use. Hemel
Hempstead: Prentice Hall.
Njiraini, J., & Aron, M. (2011, September 15). Two CMC board of directors accused
of fraud. Standard Digital News.

Accounting Term Paper

Team, S. N. (2014, September 6). Charles Njonjo, Joshua Kulei named in CMC fund
scandal. Sunday Nation .