Motivation Behind Creative Accounting Accounting Essay

Motivation Behind Creative rule of base chronicle EssayCreative chronicle system is a practice that potentially being undertaken as a result from both(prenominal) individual cargon more on their own interest and indirectly causes issues trick kayoed in ethical dimension of productive account. From information perspective, agency theory gives a fade trope on creative bill scenario. Whereby managers misuse their privileged position in manipulating financial reporting in their own interest which providing superior information content to sh areholder. Lack of personal skill or unwillingness to carry out detailed analysis making individual shareholders do not have the clear view on the effect of news report system system manipulation give a high adventure in the incidence of creative report.Definition of creative invoiceIn the USA, the preferred term of creative story is earnings management, however in Europe the preferred term is creative accounting. Generally, cre ative accounting is accounting practice that falls outside the regulation and give benefit to certain people. It can be expound as a practice with a clear aim to interrupt the financial reporting cultivate which affects report income to get ahead it looked normal and provides no true frugal advantages to relevant parties like shareholders. Concisely, creative accounting is the transformation of financial accounting figures from what they actually are to what users desire by taking advantage of the accounting policies which is permitted by accounting standard.Motivation for creative accounting on that point are several motivations have been place in stimulating the behaviour of creative accounting in the organization. These are proven by several(a) researches being done in the past.Firstly, the significant motivator for creative accounting is to report a turn out in business income to lower the tax paid. Second, to alter the come withs performance appear better in future, company will maximize the reported loss to name bad loss in that year. This is called big clean accounting for the purpose in smoothing the income. Thirdly, to provide positive view on expectations, securities military rating and reduction on risk for analysts in anticipated capital market trans fulfilments and maintain firms performance in analysts expectation. another(prenominal) motivations are to manipulate profit in arrange to match the reported income to profit forecasts and to distract anxiety from negative news by boosting companys profit figure though change in accounting policies. Managers motivations in managing earning aim to report a stable growth in profit not only to reduce the perception of variability toward organisations earnings, alone to a fault are in relation to income measurement. In order to make company faces less risk and profit more benefit in aspect of raising fund, putsch bids as healthful as prevent takeover by other company.Creative accounting is unavoidable to maintain or promote the share price and create a good profit growth. To gain benefit from inside knowledge, director of the company engage creative accounting to postpone the release of information to the market. stand up but not least, many types of contractual right, obligation and constraints based on the amount reported in the accounts also motivate company to apply creative accounting.Techniques of creative accountingCreative accounting is actively applied in six areas. The first area is regulative flexibility, whereby changes in accounting constitution are permitted by accounting regulation. For example, IAS permit carrying non-current asset can be recovered at each re comfortd amount or depreciated historical cost in asset valuation. Secondly, dearth of regulation by which some accounting treatment might not be fully regulated as at that place is hardly a(prenominal) mandatory requirements.The third area is management has large extent of estimation in discretionary areas, such as assumption in bad debts provision. Fourthly, some transactions can be timed as to establish the desired appearance in accounts. For example, the manager is free to choose the measure to sell the enthronisation just to increase earning in the accounts. Fifthly, to manipulate balance sheet amounts by utilize artificial transaction.Last but not least, by reclassification and bearation of financial amounts through balance sheet manipulation in order to smooth financial ratios and also based on cognitive reference point in financial numbers presentation.Existence of creative accountingTheoretically, managers motivation in creative accounting is acceptable. However, there is various empirical studies have concluded that certain of companies apply a particular techniques of creative accounting to some extent, for example, applied in non-discretionary component of the bad debts provision. Other evidence is classificatory smoothing by using the extraordina ry particular propositions, such as pensions cost, dividends from unconsolidated subsidiaries, extraordinary charges and credits and research and development costs in manipulating the figure of income in financial statements as it was proven by several researchers. merchandiser found that managers have a go at it manipulative behaviours in accounting information and Black argued non-current asset sales are exploited by manager as creative accounting tools through timing of its transactions since relevant accounting standards are permissive. Creative accounting behaviour is slightly still persisting although regulations are tightened.Amat reported out of 35 large listed companies especially in Spanish identified that creative accounting behaviour was overt and considered legal. In addition, there are 3 possible indicators of creative accounting (1) auditor report qualifications, (2) special authorizations from regulatory agencies, and (3) changes in accounting practices.In Spanish case, the direction of creative accounting was connected to general economic conditions and this somehow affected reported earning and adjusted earning against Spanish listed companies. However, there are some unique features of Spanish accounting environment bring out special attention such as the audit report qualification are ordinary, and creative accounting may be arose from the collusion of the regulatory government activity.Creative accounting behaviours can be identified by having thoughtful analysis of financial statement or notice by reasonably considerably- informed user of financial statement. But, how clearness the users of statement observe creative accounting is questionable. As in Spanish, analysts fail to report the existence of creative accounting. Anyway, value of information content in financial statement is concerned even though financial statements give adequate information enable users to adjust for creative accounting as certain investors rely on reported earning numbers in income statement.Ethical perspective of creative accounting in that respect are some ethical issues concerning the exercise of creative accounting. Revsine stated that loopholes in accounting standards provide manager some spaces in the sense of manipulate the timing in income reporting. In his cerebration, accounting is a tool to supervise contracts between managers and financial groups, identify possibility of accounting manipulation and how properly it reflected in pricing and contracting decisions. Ethics of bias in choosing accounting policy which implied in creative accounting can be seen through accounting regulators and management level.There are 2 views of accounting (deontological and teleological) which viewed assortedly by Revsine and Ruland. From Rulands perspective, deontological view is the moral applied to actual action and teleological view is actions should be judged based on the result of such action. Whereas from Revsine perspective, teleolog ical view of accounting is employed in private sector which permit manager to use loose standard to achieve what they extremity and deontological view is about strict standard in preventing accounting manipulation in exoteric sector. In addition, Ruland has also differentiated positive responsibility and negative responsibility. From accounting perspective, positive responsibility refers to present an account free from bias. Meanwhile, negative responsibility refers to managers would be liable for actions done by others, which they fail to avoid. Compared to traffic to act, Ruland has stressed on duty to refrain, which means avoid the inherent bias in creative accounting. Its splendour can be looked into 3 issues, which are relentlessness, certainty of result and responsibility.Professional accountant regards creative accountings are ethically doubted. Conner stated that managers tend to misapply accounting principles to give better appearance in financial statement to investors . Conflict of interest, client requests to alter account and for tax evasion are the most ordinary ethical issues. Accountants attitudes toward creative accounting depend on whether it is arisen from misuse of accounting principle and manipulation of transactions. Merchant and Rockness found that accountants more critic in misuse of accounting principles as accountants duty is on rule-based and it falls within their expertise. Failure to act ethically may damage the reputation as an accountant unless he or she reports the curse to the appropriate party. Slotting is not an acceptable accounting treatment in company practices.There are some action can be taken by accounting regulators in order to restrain creative accountingDecrease allowable accounting method or fix method used in different condition so that scope for choosing accounting method can be narrow downed. Companies should also be consistent in using method chosen by them. around rules should be established to reduce the abuse of judgement. For instance, International Accounting Standards presently have almost distant the extraordinary item from operating profit. Also, companies should be consistent in applying accounting policy to restrain the abuse of judgement.Implementation of Substance over form can decrease artificial transaction and this can make linked transaction become one as whole.To restrict the use of timing of genuine transaction, item in account should be regularly revaluated. The increase or decrease in value should be stated in the account each year the revaluation occurs. International Accounting Standards also tends to value item at fair value rather than historical cost.Besides alteration in accounting regulations, ethical standards and governance codes must be properly executed to avoid individuals from performing creative accounting. resemblance with other author on the article presentedFrom the study done by Dilip and Eno in Creative Accounting in Bangladesh And Global Perspe ctives found that the cause of creative accounting is the conflicts of interest among different interest groups. For example, managing shareholders want to pay less tax and dividends. Investor-shareholders are interested to get more dividends and capital gains. Countrys tax authorities would like to collect more and more taxes. Employees are interested to get better salary and higher(prenominal) profit share.Dilip and Eno also reported that creative accounting may arise under 3 different financial market conditionsDepending on the financial market evaluation of the companys future prospects, company keep changes its shares to eviscerate investors to contribute to such shares either at par or at a premium.Aim to show a desirable picture of its financial conditions when the company whose shares are already listed in a farm animal exchange.Based on inflated profits through overvaluation of assets, undervaluation of liabilities and change in systems of stock valuation that promote th e image of company in a short time, company having its shares listed in the stock exchange may declare and pay high dividends.Both of them examines creative accounting in Bangladesh scenario, they found out many of the company prospectuses published in Bangladesh are based on creative accounting. An expert opinion survey also done by them and result showed that although it is not clear for how long, creative accounting has been clearly practice in Bangladesh. Creative accounting not only being practiced in Bangladesh but it seems to be widespread globally in developed countries such as UK, USA as well as Australia. And the case of Enron is the most broadly known case of creative accounting in USA.Dilip and Eno also suggested that the code of professional ethics should be strictly overemphasized. Accounting education is needed as well as the responsible of instructor to instill moral values of integrity, honesty and sincerity into students character as it is critical to modern socie ty, the business world and the accounting profession.