ACCOUNTING AND FINANCE

Accounting and Finance



Accounting and Finance

Creative Accounting

The concept of "creative accounting", which at the time of appearance in the media, electrified not only American, but global investment markets. The essence practices of this concept lies in the fact that management's falsification of its financial results with a view to inflating profits and reduce losses. Such actions could keep stock share prices high, and this practice was closely related to the personal interests of members of the management. Creative accounting is not just an American idea. Firm have a statutory duty to systematically report on the economic results achieved and to undergo an audit of its financial records on the books. Audit firm accounting controls confirms that according to her knowledge and experience presented to verify the accounts are properly carried out, which gives investors a guarantee that everything written in them is consistent true and applicable law. This warranty is for the auditor's prestige market investors resulting from high competence and confidence in him. It is obvious that successful cheating stock investors would have been impossible without the willingness to make such a fraud on the company and management team without the erroneous assessment of the accounting records by the auditor, or in specific cases without his conscious participation in the fraud. Proponents of creative accounting argue that these actions which include window dressing, cosmetic accounting, or financial engineering are appropriate as they enhance the share holder's wealth. On the contrary, opponents debate that these actions are against the ethical code of conduct. Whatever the motivations may be of engaging in such practices, management should not manipulate in such unethical acts under the realm of shareholder's maximization (Watts, 2003, pp. 10).

The main motivation behind these practices is associated to the level of earnings. Management manipulates the financials to portray a highly profitable company to the stake holders. They adopt certain techniques to fulfill the purpose. These include flexibility in regulations, manipulation with the timing of transactions, creating artificial transactions, expanding the scope of management in terms of bad debt provisions and re classification of the financial numbers. These techniques have proved to be useful and successful in the window dressing of accounting and financial statements.

The primary objective of any financial manager is to maximize share holders wealth. However, this objective is misinterpreted by the organizations. In today's scenario, it has become a practice that the compensation of the employee is linked with its performance. This leads to some unethical and self centered decisions on the part of managers. They engage in risky ventures to gain maximum bonus or reward. Although, it provides them advantage in the short term, however, it is against the objective of maximization of share holder's wealth. This results in Agency conflict. To minimize this issue, organizations provide employee stock options as per which the employees are shareholders of the firm. In this way, their decisions are always aligned with organizational objectives and shareholder's interest (Nick, 2008, ...