Creative Accounting

Presented by: Nikita Sharma 19BSP1735

Nishchay Kashyap 19BSP1768
Pankul Arora 19BSP1812
Pranav Bhatia 19BSP1923
Pranshu Jaiswal 19BSP1944
Prateek Singh 19BSP1971
 CREATIVE ACCOUNTING

 Creative Accounting refers to the accounting practice that may not

follow the accounting principles or standards
 Deviate from the principles or standards in order to show a desired
image of the company to the stakeholders.
 Creative Accounting is the transformation of financial accounting
figures from what they actually are.
 Creative Accounting uses the various loopholes in accounting
principles or standards to show the desired results to the
stakeholders.
 IS IT GOOD OR BAD?

The final answer to this question lies in the “Purpose” for which it is
used and the “manner” in which it is done. Creative Accounting is a
tool which can be used or misused by the management. If it is
misused, then the sole fault is of the management.
For the good part Creative Accounting can be used to produce more
meaningful figures and avoid unjustified figures, in such cases the
changes may be clearly indicated in the notes to the accounts.
 WHY CREATIVE ACCOUNTING?

 To counter competition from other companies that have better financial

records.
 Window dressing for an IPO or a loan.
 Provide Income smoothing- for increasing the stock prices & maximising
the firms value.
 To meet integral targets.
 Taxation- To enjoy Tax benefits.
 Survive from bankruptcy.
 To attract more Investors.
 Hide a particular bad year of the company.
 METHODS FOR CREATIVE ACCOUNTING
 Income smoothing.
• It is the shifting of revenue and expenses among different reporting periods in order to present
the false impression that a business has steady earnings.

 Movement of sales.
• Movement of interdivisional sales causing depiction of higher sales.

 Corporate Takeover
• Leads to adjustments in assets, liabilities and capital. Thus leading to better financial position.

 Off-Balance sheet Financing

• Leasing, Higher purchases, Share buyback and other tools used to arrange finance.

 Overstatement Of Assets
• Can be done with various assets such as inventory, cash, & other current assets.
 METHODS FOR CREATIVE ACCOUNTING[CONTD.]

 Manipulation of accruals.
 Overestimation of revenues by recording fictitious sales
revenues.
 Changes in accounting policies and depreciation methods.
 Manipulation of receivables write-offs.
 COMPANIES WHO DID IT
Companies Year(s) Nature of Creative Accounting Followed
Wipro Ltd. 1996-97 and It converted its fixed assets into stock and the excess amount was
1999-2000 credited to reserves, which improved their net worth per share and
current ratio and neutralized the effect on profit on reduction of
land value.
Bombay Dyeing 2003-04 and Creating provisions for possible loss on firm purchase contract and
2004-05 subsequent write-back of such provision thereby converting
operating losses into operating profit
Apollo Tyres Ltd. 2004-05 Debiting profit and loss account with additional excise duty payable
to the government and transferring equivalent amount from general
reserve to neutralize the effect.
Larsen & Toubro Limited 1999-2000 and Income recognition through transfer of loan liabilities at a lower
2001-02 consideration.
Hindustan Zinc Ltd. 2003-04 and Reclassifying investments into tangible assets to bend the
2004-05 requirement of valuation of investments.
Satyam Computers Services Limited 2008-09 Fraudulently incorporated a non-existent cash component by
inflating the bank balances.
ONGC Ltd. 2004-05 Capitalization of interest as well as other intangible assets to show
increased fixed assets value and understating revenue expenses.

Telco 2001-02 Capitalized dinner party expenses instead of writing it off and
showed only a modest loss of 53 crores instead of actual loss, which
was very huge.
 SATYAM COMPUTER SERVICES SCANDAL

 Satyam computer services was established in 1987 by owner and

founder B. Ramalingam Raju.
 It was the 4th fastest growing IT company with 9% market share in
India.
 With over 40000 employs and revenue of $2.1 billion.
 Was listed in three international exchanges i.e. NYSE, DOW, and
EURONEXT.
 Now known as Mahindra Satyam, after being acquired by Tech
Mahindra.
 UNDERSTANDING THE SCAM
The balance sheet as on September 30, 2008 showed:
 Inflated (Non-existent) Cash and bank balances of ₹5,040 cr (as against
₹5,312 cr reflected in the books).
 An accrued interest of ₹376 cr was also shown which was non existent.
 An understated liability of ₹1230 cr on account of funds arranged by
B.R.Raju.
 An overstated debtors position of ₹490 cr(as against ₹2651 cr as refleted
in the books).
 For second quarter it reported a revenue of ₹2700 cr and an operating
margin of ₹649 cr as against the actual revenues of ₹2112 cr and
operating margin of ₹61 cr.
 This resulted in artificial cash and bank balances going up by ₹588 cr in
Q2 alone.
 TECHNIQUES OF CREATIVE ACCOUNTING FOLLOWED

 Income Recognition
• Satyam adjusted profits from one year to another year resulting in inflated profits.

 Overstatement of Assets
• They constantly increased their Work in Progress from March 2004.

 Creating Fictitious Assets/Revenues

• Fake Fixed Deposits of worth ₹3317 cr.
• An accrued Interest of ₹376 cr which was non-existent.
• Created fake overseas clients and contracts which resulted in Overstated Revenues.

 Corporate Takeovers
• Owner was transferring the money from Satyam to Maytas for 6 years.
• He wanted to acquire Maytas to cover up Satyam’s inflated case. Though, his last attempt
to fill the fictitious assets with real ones failed.
 CONCLUSION

 The urge of the companies to remain in the competitive market has

been one of the biggest of motivator of creative accounting.
 In case of Satyam the practice of creative accounting was adopted,
this ultimately led to sudden collapse of the company.
 The companies should totally avoid using short term benefit of
creative accounting as it create lies with the owners of the company.
 The introduction of international accountings standards will also help
prevent the creative accounting practices.
 The government must also do something to prevent creative
accounting practices by the companies.
THANK YOU!