MANAGEMENT is efficiency in climbing the ladder of success; LEADERSHIP determines whether the ladder is leaning against the right wall - Stephen Covey

Thursday, December 29, 2005

Creative Accounting

Creative Accounting refers to accounting practices that deviate from standard accounting practices (GAAP, FRS, AS etc...) and are characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities....well, am glad you realized there is no need to have a novel way to account for expenses...everyone gets novel (sometimes overboard!) once in a while to account for expenses (whether incurred or not!). Many a times, the words "innovative" or "aggressive" are used as a surrogate for "creative"...its just a jargon - who cares!

The fact of the matter is that by using such creative accounting practices, many organizations (am constrained by character count to name all of em'!) have been subject to accounting scandals & other fraudulent "innovative" mis-adventures that had ultimately led to its own dwindling (apart from swindling!). One must understand that because of such several dismal events, the accounting & auditing fraternity were put to humiliation, mortification and severe embarrassment, though the fault doesn’t fully lie with accountants…well, am not here to play the blame-game but we must understand that it is the responsibility of the management of a company to prepare its books of account as per the generally accepted accounting principles & conventions and the auditor (accountant) is supposed to express an independent opinion (qualified or otherwise!) on the accounts prepared by the company’s management. Again, to qualify or not is another matter altogether….it again depends on so many things right from auditor independence, client relationship, fee-hike, new business proposition, consulting services & other non-audit services et al.

To conclude, I feel that both companies and accountants must understand the repercussions of creative accounting practices and ensure that accounting doesn’t actually get too creative to count beans behind bars!


Blogger J.KANNAN said...

A well-defined and crisply presented write-up indeed deserves deep appreciation in addition to a pat on the shoulder & shot in the arm. It should be an eye opener for preparators of books of Accounts and more for Auditors who are expected to express an unbiased and independent opinion with professional justification in case of a qualification report.

All said and done the habit of counting beans behind bars will continue to exist because of elusive loopholes in the reporting system that exists and needs to be eliminated.

May good sense and caution prevail upon the preparators of books of accounts and its persuers?

5:25 PM

Blogger Trevor Gay said...

Hi Sriram

As a non numbers man myself I always like the expression 'Its all smoke and mirrors'

Accountants in my experience in the national health service in the UK always seemed to find ways of 'hiding' money until there was a crisis!!

6:37 AM

Blogger Felix Gerena said...

As a former accountant and a person who really enjoyed his work at this field I´d like to say that there´s certainly a risk in creative accounting. Though every country´s accounting Law is different. Some law systems permit different kinds of valuation for assets or for the investment/expense pair. What is important from the management perspective is to keep an internal accounting system that really reflects the financial situation. You can deceave others but, please, don´t deceave yourself.

11:08 PM


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