Lecture 11 Creative Accounting
Learning Outcomes
Definitions and motivationsPresentations and methodsScandals and implicationsControlling creative accountingResearch evidence
Company Ownership & Control
Crashed Objectives
ShareholdersMaximise profits: dividends and capital gainsLong term business growthMerger & acquisitionRisk projects with high returnsDirectorsMaximise benefits and job securityShort term business performanceAvoid merger & acquisitionAvoid risk projects
Two QuotesLafferty (2000): “How do you explain to an intelligent public that it is possible for two companies in the same industry to follow entirely different accounting principles and both get a true and fair audit report?”Griffiths (1986): “Every company in the country is fiddling its profits”
Presentations of Financial Statements
True & fair view/fair presentationUsing the flexibility within accounting to give a true and fair picture of the accounts so that they serve the interest of users.Creative accountingUsing the flexibility within accounting to manage the measurement and presentation of the accounts so that they serve the interests of preparers.
Presentations of Financial Statements
Impression managementUsing the flexibility of the accounts (especially narrative and graphs) to convey a more favourable view than is warranted of a company’s results serving the interests of preparersFraud Stepping outside the Regulatory Framework deliberately to give a false picture of the accounts
The exercise of (legitimate) choice in accounting for transactions and events with the motive to improve the performance and position of the businessBoost profits to benefit from:Profit related payShares and share optionsManage gearing ratioProfit - smoothing
Methods of Creative Accounting
Management manipulationsIncome recognitionInterest payable e.g. capitalisationStock evaluationDepreciation methodsAmortisation of goodwill and intangiblesOff balance sheet financing: leases
Methods of Creative Accounting
Example – stock valuationA plc has only one asset, stock, worth say £20 million. If capital is £10 million and this year’s profit is £10 million, then its balance sheet:Balance sheet £m £mCapital 10 stock 20Profit 10 20 20SamplesDefinition/presentation of transactions and eventsDebt vs. equity with respect to financial instrumentsCapital vs. revenue items (e.g. accounting for interest expenditure)Recognition issues of assets and liabilitiesOff-balance sheet financing (e.g. accounting for leases)Intangible assets (e.g. goodwill and brands)Pension assets/liabilitiesSamplesMeasurement issuesThe revaluation of tangible fixed assetsAmortisation of intangible assets (e.g. goodwill and brands)Income smoothingOpportunities within accounting for provisionsGraphs may be usedSelectivityDeliberately to exaggerate trends 留学生论文代写网代写留学生论文,英国硕士论文,澳洲论文,
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