Creative accounting is an innovative crime

It is weird to imagine how a stark subject like accounting can become creative. Creative accounting, also called aggressive accounting, is a method by which accountants manipulate the figures displayed in a business account report, by virtue of their accounting knowledge. Such a method of manipulation can forcefully project a company to have steady income and profit. Consequently, this has necessitated investigation of creative accounting by financial analysts and investment advisors.

The intention behind creative accounting is to bring a smoothing effect through accounting practices like stock valuation, accruals, reducing or creating provisions, capitalizing of stocks and off-balance sheet financing. While creative accounting has been seen as a somewhat unethical practice, earnings management (almost synonymous to creative accounting) has not been looked with suspicion. In case of earning management, directors of a firm focus to satisfy investor expectation in stock market through reports produced by stock analysts.

The reason behind adopting creative accounting is solely to make the stocks of a company lucrative in stock market. This will allow investors to tilt towards the company stocks, eventually manipulating investor predictions. The income smoothing, caused by creative accounting, shields volatile profits of a company. This is done typically by making high provisions against asset value and for liabilities during the prosperous years of a company. Later on these provisions are reduced to manipulate the reports.

Such accounting methods are adopted by myriad companies and especially large corporations. Naturally, accountants produce financial results on behalf of a company in an objective manner. This deceitful approach can be cause potential damage to the invested money on the company stocks. Investors need to be watchful in this matter and must invest prudently.