Creative Accounting (Oxymoron)

This refers to the practice of staying within accounting standards while presenting a company’s performance in the most favorable light—or, in some cases, an unfavorable one, if that aligns with management’s objectives. Financial statement preparers comply with the letter of the law but not always its spirit. As a result, creative accounting often takes the form of “creative compliance,” which leverages the flexibility, loopholes, and shortcomings in accounting standards to present a polished version of the truth.

Common goals of creative accounting include shifting liabilities off the balance sheet or smoothing income over time. By design, these practices rarely result in auditors issuing qualified opinions. In fact, auditors, as accounting professionals, are sometimes involved in devising such clever strategies. While creative accounting is not inherently “good” or “bad,” it is a mild form of book manipulation that can pave the way for more serious abuses and undermines the quality of earnings. It is distinct from window dressing, which distorts the truth, and fraud, which conceals or outright falsifies it.

IDIOMS RELATING TO CREATIVE ACCOUNTING

Cooking the Books – Gotowanie ksiąg

• This phrase refers to falsifying financial records to make a company’s performance appear better (or sometimes worse) than it actually is.

Off-Balance-Sheet Financing – Finansowanie pozabilansowe

• A practice of keeping liabilities or debts off the official balance sheet to make the company look financially healthier.

Big Bath Accounting – Kąpiel oczyszczająca w księgowości

• This refers to taking a massive one-time write-off or loss to „clean up” a company’s financial statements, often to set up a better performance in future periods.

Earnings Smoothing – Wygładzanie zysków

• The manipulation of financial statements to make earnings appear more consistent or predictable, often by shifting income or expenses across periods.

Round-Tripping – Obrót zamknięty

• This involves selling an asset or product and then buying it back (sometimes at the same price) to artificially inflate revenue.

WHY DO CFOs RESORT TO CREATIVE ACCOUNTING?

There seem to be various reasons for the existence of creative accounting, including:

– getting around restrictions (for example, to report sufficient profit to be able to pay a dividend);

– avoiding government action (for example, the taxation of excessive profits);

– hiding poor management decisions;

– achieving sales revenue or profit targets, thereby ensuring that performance bonuses are paid to the directors;

– attracting new share capital or loan capital by showing a healthy financial position;

– satisfying the demands of major investors concerning levels of return.

CREATIVE ACCOUNTING METHODS

OVERSTATEMENT OF REVENUE – ZAWYŻANIE PRZYCHODÓW

There are several approaches that unscrupulous directors have adopted with the aim of manipulating the financial statements. Some of these methods concern the overstatement of revenue. This often involves the early recognition of sales revenue or the reporting of sales transactions that have no real substance.

MANIPULATION OF EXPENSES – MANIPULACJA KOSZTAMI

Some creative accounting methods focus on the manipulation of expenses, and certain

types of expenses are particularly vulnerable. These are expenses that rely heavily on the judgement of directors concerning estimates of the future or concerning the most suitable accounting policy to adopt.

CAPITALISATION OF EXPENSES – KAPITALIZACJA KOSZTÓW

The incorrect ‘capitalisation’ of expenses may also be used as a means of manipulation.

Capitalisation is treating expenses as if they are part of the cost of a non-current asset. Businesses that build their own assets are often best placed to undertake this form of malpractice. The effect of capitalisation of expenses is falsely to boost both profit and the balance sheet value of non-current assets.

CONCEALMENT OF LOSSES OR LIABILITIES – UKRYWANIE STRAT LUB ZOBOWIĄZAŃ

Some creative accounting methods focus on the concealment of losses or liabilities. The financial statements can look much healthier if these can somehow be eliminated. One way of doing this is to create a ‘separate’ entity that will take over the losses or liabilities.

OVERSTATEMENT OF ASSET VALUE – ZAWYŻANIE WARTOŚCI AKTYWÓW

Creative accounting may involve the overstatement of asset values. This may involve revaluing the assets, using figures that do not correspond to their fair market values. It may also, as we have seen, involve the capitalising of costs that should have been written off as expenses, as described earlier.

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