Uncovering Creative Accounting docx

[...]... makes creative accounting so difficult to judge and to police 3 Uncovering Creative Accounting BACK TO BASICS To understand the practices and abuses of creative accounting, it is necessary first of all to understand accounting This does not necessarily mean mastering doubleentry bookkeeping – that is the mechanics of the process which cannot, on its own, prevent creativity The books still balance when creative. .. provides a good starting point because it leads to a helpful working definition of creative accounting In this book we will work to the definition that creative accounting is: Allowing the desire for a particular answer to adversely influence objectivity and to justify the choice of inappropriate accounting methods Creative accounting in a publicly quoted company is about manipulating the financial numbers... practice has become known as ‘reserve accounting 7 Uncovering Creative Accounting A problem with establishing cast iron accounting principles is that they can rarely apply to all kinds of business Another traditional accounting principle has been that a profit must be realised if it is to be shown in the P&L, and this rule was maintained by this practice of reserve accounting However it became clear... should make creative accounting difficult to achieve in practice These principles are mentioned in the UK Companies Act and thus have the force of law; they were originally confirmed in a well-known former Statement of Standard Accounting Practice – SSAP2, entitled ‘Disclosure of Accounting Policies’ (Choppings, 2002) 8 Accounting – an inexact science When the recent scandals involving creative accounting. .. per share ACCOUNTING POLICIES The responsibilities of directors and auditors are not just about producing and checking a set of accounts on an ad hoc basis They are also about specifying and regularly updating the company’s accounting policies, so that GAAP principles and 19 Uncovering Creative Accounting up-to-date accounting standards can be implemented logically and consistently These accounting. .. practical application and which have implications for creative accounting These are: Materiality Accounting principles must be applied in all circumstances where the impact of the judgement is material to the scale of the results If, however, the issue under judgement does not make a material difference because it is small in relation to 9 Uncovering Creative Accounting the total size of profits and assets,... understand the implications of accounting policies, particularly where the business is complex and where changes in policy take place regularly There was a time when there was trust in the auditors to police creative accounting through the negotiations around such policies but this faith has been seriously eroded The significance of what happened at Enron is not just that creative accounting was accepted... processes Chapter 2 covers the responsibilities of the various parties for ‘true and fair’ accounting and includes the roles and responsibilities of directors, auditors and the accounting bodies The next three chapters provide a comprehensive overview of the ways in which profit can be manipulated via creative accounting, covering both the traditional ways of ‘smoothing’ profits – for instance via stock... yet they are fundamental to the judgements that have to be made in every area of accounting The purpose of financial reporting is the key to good accounting practice We will leave out the cash-flow statement from this coverage as it is the only one of the three key financial statements that should not suffer from creative accounting problems Creativity may be applied to the layout and to the inclusions... their historical cost 5 Uncovering Creative Accounting If this principle is accepted, the issue of asset valuation does not arise It is unnecessary and irrelevant to try to arrive at current values because that is not what the balance sheet is about Asset valuation can be carried out as a separate exercise if helpful, but this is nothing to do with the balance sheet Those who guided accounting practice . makes creative accounting so difficult to judge and to police. 3 4 Uncovering Creative Accounting BACK TO BASICS To understand the practices and abuses of creative. leads to a helpful working definition of creative accounting. In this book we will work to the definition that creative accounting is: Allowing the desire