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Table of contents
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CONTENTS
PAGE
ABSTRACT
INTRODUCTION
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CONCLUSION
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REFERENCES
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1.0 Abstract
Creative accounting has been one of the most debated issue in the profession of accounting in
this decade. It is legal but unethical. Yet, it is still being adopted everywhere. The aim of this paper is
to study the mutual relationships between creative accounting, ethics as well as it effects to professional
development. In total, there will be six sections in this paper. The first section is where the creative
accounting will be defined. Secondly, the study of techniques of creative accounting. Thirdly, the
discussion of ethical perspective of creative accounting. The question whether creative accounting is
acceptable from the view of ethical perspective will be answered in this section. Fourthly, a study of
how the creative accounting will affect the professional development. Fifthly, the comparisons of the
pros and cons of creative accounting as a whole. Lastly, a summarization of creative accounting, ethics
and professional development to be drawn based on the discussion of this paper.
2.0 Introduction
By referring to the journal of Creative Accounting: Nature, Incidence and Ethical Issues,
creative accounting Involves the repetitive selection of accounting measurement or reporting rules in
a particular pattern, the effect of which is to report a stream of income with a smaller variation from
trend than would otherwise have appeared. (Copeland, 1968)
Besides, creative accounting can be defined as a practice of accounting, laws and regulations,
known as generally accepted accounting principles (GAAP) (Stice & Stice, 2006, p. 13). Although,
the GAAP is being followed by the persons-in-charge of the preparation of accounts, they are making
good use out of the loopholes of the accounting principles and standards to falsely portray a better
image for the company itself, especially when appealing with the investors. The creative accounting
issue has also been highlighted in the movie The Procedures in 1968. Noted that the practice of
creative accounting is legal however is unethical.
Definitions of creative accounting can be varied as follow:
Is any action on the part of management which affects reported income and which provides
no true economic advantage to the organization and may in fact, in the long-term, be
detrimental. (Merchant and Rockness, 1994)
Involves the repetitive selection of accounting measurement or reporting rules in a particular
pattern, the effect of which is to report a stream of income with a smaller variation from trend
than would otherwise have appeared. (Copeland, 1968)
This paper should give a better understanding to the readers about creative accounting roles in
the industry, the pros and cons of creative accounting, as well as the perspective of creative accounting
from the ethical and professional development view. We may as well see, how creative the accountants
and managers in manipulating the concept to serve its purposes.
People are likely to be in ethical dilemma if they apply the deontological theory compared to
teleological which has clear cut answer to an issue by weighing the advantages to the disadvantages.
For instance, an accountant can just listen to the order of his or her manager to manipulate the income
statement since by doing so, he or she would not lose job as from the perspective of utilitarianism.
However, if the accountant is an ethical person who holds strongly to the five fundamental principles
of professional accountants that conducting a fraud is totally wrong as it will blinded the users of
income statement from the true disclosure, then he or she would definitely encounters an ethical
dilemma. Possibly, the accountants will not follow the order of their superior.
3.3 Ethical relativism theory
Ethical relativism is the view that there are no universal moral rules. What is morally good in
one context may be morally bad in another. There is no rational way of determining whether an action
is morally right or wrong because different societies have different ethical beliefs unless by asking the
people of this or that society believe it is morally right or wrong. In other words, relativists argued that
there are no ethical standards that are absolutely true and that apply or should be applied to the
companies and people of the societies.
Relativism believes that something is morally right for the people or companies in one
particular society if it accords with their moral standards and vice versa. For instance, the people of
certain Arab societies hold that business bribery is morally acceptable, although the Americans believe
it is immoral. The ethical relativist will conclude that, although it is wrong for an American
multinational to bribe in America, it is not wrong for Arabs or their companies to bribe in their own
society. One of the factors that affect ethical decision making is the organizational factor. If the culture
in the organization allows for creative accounting to be practiced then there would have no issues of
unethical conduct arises as the organization culture believed it is morally right to do so.
dealing with all transaction occurred in the company. All transactions must be approved with the right
procedure and had been authorized by the right person on its. Breach of it will resulting in heavy
punishments. For instance, Tyco executives were sentenced up to 25 years in prison after stealing by
manipulating the figures in financial statement of the company. In the case of professional accountants,
they should not make the misleading statement and materially false the report or communication of
information. An accountant also must expertise on the preparation of financial statement to prevent the
information furnished recklessly. The information provided should be clear and not contained in any
confusion that may be convicted. Creative accounting also should be avoided because it can challenges
the integrity of the professional accountants.
Objectivity discussed about an obligation of all professional accountants not to sacrifice their
professional and business judgment because of own interest and the undue influence of others. For
example, objectivity of Arthur Anderson who was the external auditor of Enron was impaired.
Anderson helped Enron cheated on its financial statements with overstated Enron profits 20 per cent
of it's earning for the 4 years, to prevent the loss of his important clients. Relationships that unduly
influence the professional judgment of the professional accountant should be avoided. In addition,
objectivity principles also can be explained further with the auditing aspects. Internal auditor is an
employee in a company and depends on management for salary and remuneration. So, he or she might
be biased in favor of management. For example, internal auditor does not report to the audit committee
when he or she discovered fraud because management threatened them to keep silent. Internal auditor
who afraid to lose their job in the company or being offers a high bonus may just follow the
management favor.
Professional competence and due care describes the obligations of professional accountants on
maintaining professional knowledge and skills at the level required. This is to ensure that employers
or clients receive competent professional service in their organization. While providing professional
services, an accountant should act diligently and technically with the applicable technic and
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professional standards based on their expertise and regulations to show due care. Apart from that,
maintenance and attainment of professional competence are also important. Competence can be
clarified in many definitions such as a performance at workplace, applied what you already learned
and a focus on output rather than input (Brown & McCartney, 1994). Ethical competence also
distinguish between simply having skills and expertise, and having a true sense of professionalism,
(Parn, 2007).
Lastly, the principle of professional behaviour explained about the obligation of professional
accountants to comply with regulations and relevant laws, and also avoid any behaviour that may bring
discredit to the profession. This also includes give all relevant information to third party, which as the
result gives negative effects the reputation of the accounting profession. Professional accountants
should be truthful and honest. They should show good manners in accordance with those holding
positions as a professional accountant. As an example, an accountant cannot make exaggerated claims
for the services. All the claims, should under consideration from the business and the accountant
qualifications. Also, an accountant cannot critics and makes comparisons to the work of others.
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improve their business. Therefore, by using one mode of creative accounting, Off-Balance Sheet
Finance (OBSF), the company may gain a greater amount of loan from borrower. This is because of
the true financial position of the company in relations to its debt is distorted as it does not disclose
certain information in report. With that, companies are able to appear with appropriate debt ratio that
required by borrower in order to borrow more money (Mathews and Perera, 1996). As a result, not
everything that looks like profit is really a profit after the implementation of creative accounting.
c) To meet the internal expectations of company
A manager is responsible for managing company towards achieving the objectives and
company's expectations that has been made. Internal expectations can be categorized into various parts.
For instance, a forecast to get higher target on sales, profit and share price. These forecast will give
pressure to company that has poor performance and at the end, would push the manager to implement
the creative accounting. Creative accounting is legal for the manager to adopt however it is unethical
as there will be a gap between the actual performance of the firm and analysts expectations.
Managers have to make sure the accounts came out as expected in order to secure their job. An
example of creative accounting techniques that likely to be use was timing of a sales transaction. To
illustrate, if a company own a building that worth RM150,000 at historic costs, which is the book value
amount on the financial statements, and that building now has a current market value of RM800,000,
manager can freely choose whether to sell it now or not. Certainly, if company performance has
reached the forecast performance of the company, the best accounting option for company is not sell
the investment now. According to Hooper (1999), because of the discretionary nature of accounting,
it will always involve choices.
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The practices of creative accounting make the information from financial statements become
unreliable and none useful anymore for investors to use it for the purpose of decision making.
In the real world situation, investors will find a company that clearly void the implementation
of creative accounting practices to invest. Nonetheless, it illustrates that its fruitless to invest
elsewhere in the world as the practice of creative accounting seems to be happening everywhere. Also,
Kraus (1999: p. 1) said, Dont believe any figures you get as there are unseen risk. This is the followup of the worldwide spread of this creative accounting practice in companies.
b) Effect the integrity of the profession
Fraud in reporting usually occurs among those above management level. According to Jones
(2011, p. 21), the concept of creative accounting has developed over time under the pressure of users,
such as managers, accountant, auditors, regulators, shareholders, and others. This situation will bring
a negative perception about the professions. Till some accounting practices that are legal to use
becomes suspicious by outsiders. Financial statement has to be transparent from any erroneous
activities. When creative accounting is used to create fraud, it will dampen the reputation of
professional accountants that prepared it. Consequently, it will creates a bad perception towards the
accounting profession. As a professional accountant, there is a duty to act professionally in order to
uphold the image of the profession. Reputation takes years to build while a tarnished reputation will
take double effort of building the initial reputation.
c) Effect the long run of business
The practices of creative accounting do give a benefit to business. However, it also effect the
long run of business. Norgard (1987) argued that many companies use creative accounting methods to
maintain their profits or minimize their losses. On top of that, an accountant did some changes to their
debit and credit entries which is no longer showing a true and fair view representations.
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At first, auditor may fail to detect it. Somehow, when the same things always happen to the
company, this unethical practice will be detected and the company may be banned by many
stakeholders. Here David Brown, a Canadian corporate regulator make a comparison between
companies that applies creative accounting to athletes on steroids. Athletes that took steroids not
allowed to involve race and banned from competing again in a period. Then he said, a similar
punishment should be applies to company that practiced creative accounting to misrepresent their
company.
d) Vibrant demand for creative compliant.
Can creative accounting ever be stopped? It is a big question. However, the answer is probably
not. Creative accounting practices has become a part of business nature because it is the best way and
easy way to set up a desired value and to attract stakeholders. Good ethical not be considered when
profit maximization is main priority of companys objective.
Moreover, Griffiths also mentioned that there is nothing to eliminate creative accounting when
the imposition of standards seems more sophisticated forms of financial manipulation. Due to that, it
is not impossible that vibrant demand for creative compliance will happen. In the end, there will be a
creative accounting arms race. So, all stakeholders must be aware in making any decision. Lastly,
deeply said by Austin Mitchell, manipulative accounting could be a name for creative accounting since
it has more in common with the massage parlour than the creativity of the literary salon.
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6.0 CONCLUSION
In conclusion, one may think accounting is a clear-cut issue, but creative accounting sure is not.
However, creative accounting is not genuine illegal, but on the other hand, it is not widely promoted.
Managers and accountants may employ creative accounting or do it by themselves for the best interest
of the firm. Although they must follow generally accepted accounting principles (GAAP) while
completing financial statements, still, there is loopholes in the framework that allowed for
manipulations of certain items in financial statements.
It is impossible to impose similar standards in this world because of several reasons such as the
status of the country, the size of the businesses and the nature of the business operations. Hence, many
techniques were introduced and practiced by the accountants for the earning management. Next,
creative accounting is deemed as legal as long as it does not lead to fraud but from the ethics
perspective it is an unethical act. There are many ethical theories to support the arguments for and
against the implementation of creative accounting. No fines or punishments could be enforced on
someone as long as it is still legally right. Noted that, an action is deemed ethical or not is based on
the ethical theory that he held.
A bad sprout in a family will destroy the image or reputation of the family members as a
generalization. Same goes to the profession of accountants as well. Professional accountants accused
of misleading the users of financial statement and being convicted with frauds will leave a bad
impression to the community regarding the profession. Working in a professional field required the
practitioners to obey the standards and regulations that have been set. As for the case of professional
accountants, it is stated in one of the fundamental principles which is personal behavior where an
accountant has to comply with relevant laws and regulations and should avoid any action that discredits
the profession.
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Should creative accounting practice be totally restricted? This is a point to be pondered on.
There are pros and cons of creative accounting. However, it is hard to come to a consensus whether it
is completely bad because different parties have different point of view. For instances, from the
perspective of the company, they may think that creative accounting is necessary to drive their
performance and might as well make it as a culture of the organization. On the other hand, from the
perspective of the stakeholders, the investors to be precise, they are strongly against creative
accounting as it denied them a truth picture of the companys performance. Hence, the practice of
creative accounting is debatable and further research and study have to be done.
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7.0 REFERENCES
2. Creative Accounting and Earnings Management. Slideshare. Retrieved May 6, 2014 from
http://www.slideshare.net/Ziela87/creative-accounting-15779257
3. Dharan, B. and Lev, B.: 1993 'The valuation consequence of accounting charges: a
multi- year examination', Journal of Accounting Auditing and Finance, 8 (4), pp 47594.
4. Fox, J.: 1997 'Learn to play the Earnings Game', Fortune, 31 July.
7. Kueppers, R.J. and Sullivan, K.B., (23 September 2010). How and why an independent audit
matters.
Retrieved
May
2014
from
http://www.palgrave-
journals.com/jdg/journal/v7/n4/full/jdg201022a.html
8. Largay, J.: 2002 Lessons from Enron, Accounting Horizons, Vol. 16, No. 2, p.154
Mills, J. R. & Bible, L. Toward Student Development Of A Better Understanding Of The Cash
Flow Statement. The Journal of Applied Business Research. Retrieved 12 May 2014 from
http://journals.cluteonline.com/index.php/jabr/article/download/2127/2104
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13. Amat, O., Blake, J. & Dowd, J (1999). THE ETHICS OF CREATIVE ACCOUNTING
Retrieved from: http://www.econ.upf.edu/docs/papers/downloads/349.pdf
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