Creative Accounting And Techniques

Creative accounting is a technique which is aimed to make or interpret accounting policies

wrongly by misusing the accounting techniques and standards that set by the accounting bodies.
The idea of practicing creative accounting is to generate profits by not reporting the accurate
figures to benefit a specific group of individuals. There are many approaches of creative
accounting such as wrong estimation of inventory in stores, failures to make proper contingent
liabilities, booking less expense, manipulating depreciation figures, lowering liabilities of the
company, and manipulating revenue and sales figures
Window Dressing
Window dressing refers to measures used to make a company's financial statements appear better
(Accounting Tools, 2022). Window dressing is particularly popular when a firm has a big
number of shareholders because it allows management to present investors—who most likely do
not have much daily touch with the business—with the impression of a well-run corporation. It
might also be employed by a business to win over a lender so that it might get a loan. There is no
motivation for anyone to add window dressing to the financial statements since the owners of a
closely held company are typically more knowledgeable about the business performance (Ali,
2020).
Through window-dressing technique, Lehman has removed roughly $50 billion from its balance
sheet before declaring bankruptcy and it reduces its debt. It was said that Lehman 6 has a
negative cash flow before it is declared to be bankrupt which has caused Lehman unable to meet
the current obligations. According to (Azadinamin, 2013), Lehman could not maintain
confidence because of various of its business has shown heavy concentration of illiquid assets
with declining values.
Manipulating of Sales
Earnings management is the practise of manipulating the financial accounts to show the highest
possible net profit for the business. The term "earnings management" can mean several things
depending on the tools of manipulation, the intent behind the action, and the circumstances
around it. Although the term "enterprise management" has been defined in a number of different
ways, the literature on the subject generally agrees that the involvement of managers in EM
activities aims to manipulate the financial statements in a way that deceives the financial users. A
better compensation package, job security, career advancement, a decrease in regulatory costs,
the prevention of loan contract violations, and the enhancement of any foreseen benefits in
relation to the business and management can all be stated as explicit motivations for EM (Mohd
Taufik Mohd Suffiana*, 2015).
The second revenue-increasing strategy is known as "channel stuffing." At the conclusion of the
quarter, a manufacturer sends a sizable cargo to a distributor and reports the shipment as sales.
However, the distributor is permitted to take back any unsold goods. The manufacturer should
maintain the products categorised as a form of inventory until the distributor has sold the product
because they can be returned and are not guaranteed as a sale.
Inventory Manipulation
The value of manufactured but unsold commodities is represented by inventory. The value of
these items is added to the income statement as cost of goods sold when they are sold. Therefore,
if actual inventory and sales levels are held equal, overstating inventory value will result in an
understating of cost of goods sold and, as a result, an artificially greater net income.
Failure to make contingent liabilities
Liabilities that depend on future occurrences to prove their existence, value, payee, or due date
are referred to as contingent liabilities. Contingent liabilities could include, for instance,
warranty commitments or projected lawsuit losses. By underestimating its materiality, companies
can creatively account for these obligations. Companies understate their liabilities and overstate
their net income or shareholders' equity when they fail to register a contingent liability that is
likely to be incurred and amenable to reasonable assessment. By carefully reading the footnotes
of a corporation, which contain information regarding these commitments, investors can avoid
these issues.
Manipulation of off balance sheet
A business can establish distinct subsidiaries that could include obligations or accrue costs that
the parent company does not wish to reveal. These subsidiaries can be kept a secret from
investors if they are set up as independent legal companies that are not owned entirely by the
parent business and do not appear on the parent's financial statements.
A corporation didn't have to record particular assets and obligations in its balance sheet while
using off-balance sheet accounting because they were "off-sheet" and weren't included in its
financial statements., but it is frequently employed to make a corporation appear to have
significantly less debts than what it actually does. Off-balance-sheet accounting techniques
include moving debt to a newly formed business made just for that purpose, like Enron did.
These are also referred to as variable interest entities and are referred to as special purpose
entities (SPEs) (VIEs) (Obringer, 2020).
Off-balance-sheet organisations may be established for a number of factors, including when a
corporation seeks to fund a business initiative but is hesitant to assume the risk or when the
company carries too much debt to qualify for a loan. They can get a financing thru the new
organisation by beginning a new SPE (Obringer, 2020). Starting a SPE can make sense in some
situations. An SPE will prevent the risk from impacting your company's main balance sheet and
profits if you decide to expand outside of your core business. Before 2003, a business may own a
maximum of 97 percent of a SPE without being required to disclose the SPE's liabilities on its
balance sheet.
Manipulation of receivables write-offs
A huge bath is a significant one-time write-off that a business takes. In order to allow charges
made in the future to be mitigated against the reserve, this write-off is set up as a reserve
(Accounting Tools, 2022). The purpose of using a huge bath is to drastically reduce earnings
inside the current cycle in order to make future periods appear more successful. Although this
strategy has a history for being overused to alter the amount of net income, it can still be useful.
When a company has a history of consistently taking a big bath, accompanied by extraordinarily
robust profitability in succeeding times, a shareholder should be especially wary.
The most typical time to take a huge bath is when a company is already reporting subpar results
for the year, with the idea that investors won't be overly bothered by a bigger loss. When a
management group seeks to write off assets with inflated or false valuations, they risk taking a
large bath. For instance, management might have made fictitious sales, which necessitate
recording equivalent accounts receivable as well. These receivables can be written off using a
large bath.

References
Accounting Tools. (2022, March 02). Retrieved from Big Bath:
https://www.accountingtools.com/articles/big-bath
Accounting Tools. (2022, May 24). Retrieved from Window dressing in accounting:
https://www.accountingtools.com/articles/what-is-window-dressing-in-accounting.html
Ali, M. M. (2020). CREATIVE ACCOUNTING AND FINANCIAL PERFORMANCE OF
PUBLIC LISTED COMPANIES IN MALAYSI. Retrieved from ResearchNet:
https://www.researchgate.net/publication/338835293_Creative_Accounting_and_Financi
al_Performance_of_Public_Listed_Companies_in_Malaysia
Azadinamin, A. (2013, August).
https://www.researchgate.net/publication/230687440_The_Bankruptcy_of_Lehman_Brot
hers_Causes_of_Failure_Recommendations_Going_Forward. Retrieved from
ResearchNet:
https://www.researchgate.net/publication/230687440_The_Bankruptcy_of_Lehman_Brot
hers_Causes_of_Failure_Recommendations_Going_Forward
Mohd Taufik Mohd Suffiana*, Z. M. (2015). Manipulation of Earnings: The Pressure of
Opportunistic Behavior. Elsevier, 15. Retrieved from ScienceDirect:
https://pdf.sciencedirectassets.com/282136/1-s2.0-S2212567115X00141/1-s2.0-
S221256711501223X/main.pdf?X-Amz-Security-Token=IQoJb3JpZ2luX2VjEIH%2F
%2F%2F%2F%2F%2F%2F%2F%2F%2FwEaCXVzLWVhc3QtMSJGMEQCIFnej
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Obringer, L. A. (2020). How Cooking the Books Works. Retrieved from How Stuff Works:
https://money.howstuffworks.com/cooking-books4.htm