However, some changes in accounting standards open up new opportunities for the enthusiastic creative accountant. While creative accounting practices are not illegal, governments are constantly trying to reform the law. The legislator wants to fill these gaps in order to prevent such behaviour. Italian dairy giant Parmalat deployed a series of creative accounting and electronic fraud systems before 2003, leading to the biggest bankruptcy in European history. [15] It sold credit-related notes with the help of Merrill Lynch through a special unit in the Cayman Islands and overbooked their value on the balance sheet. He also falsified a $3.9 billion check from Bank of America. [16] The listed company explained to investors that it had liabilities of around €2 billion. USD (this figure was accepted by its auditors Deloitte and Grant Thornton International), but when it was audited more rigorously during the bankruptcy proceedings, it turned out that the company`s debt was actually $14.5 billion. [17] This massive debt has been largely caused by failed operations in Latin America and increasingly complex financial instruments to mask debt – such as Parmalat, which “bills” itself through a subsidiary called Epicurum. [18] It was also discovered that its CEO Calisto Tanzi had ordered the creation of shell accounts and embezzled €900 million to his private travel company. [17] Ian Griffiths describes creative accounting in 1986[2] This eHow video explains that creative accounting is about finding different ways to position assets.
Creative accountants aim to “inflate the image.” In other words, they want to make the company look financially healthier than it actually is. Creative accounting refers to imaginative ways of presenting accounts. These paths deviate from the spirit of accounting laws. However, they are not illegal. The goal of creative accounting is to make the business financially healthier than it really is. Trying to balance accounting with your other business tasks can easily cause rush and mistakes, which can be costly for the business in the short and long run. However, the money is tight and some creative companies may not have the office space for an extra employee or the time to train one. When regulators reform accounting standards, they aim to stifle certain types of accounting massage.
Then, creative accountants need to find new ways of doing things. The goal of creative accounting is to “portray [a] business in the best possible light,” usually by manipulating the profits or costs recorded. [4] Business leaders who participate in creative accounting may have various situational motivations for doing so, including: Ethical accountants see creative accountants in a bad light because they are trying to create a false impression. However, unlike creative accounting, cooking books is illegal. A creative accountant does not offer a “true and fair” view of a company. This is what honest and ethical accountants should do. This acts as a digital filing cabinet for all your records, meaning they won`t be lost or damaged, a frustrating event in paper-based accounting practices. The other way to outsource is to work with an accounting firm, which is especially effective with a creative industry specialist like Alchemy Accountancy, as we can use the data extracted from accounting to improve your company`s tax efficiency and business strategy. According to critic David Ehrenstein, the term “creative accounting” was first used in Mel Brooks` 1968 film The Producers, where it is also known as Hollywood Accounting. [3] The creative accountant may do off-balance-sheet accounting or publish exaggerated one-off items. The accountant may also be overly optimistic about revenue recognition. Some do this through independent virtual assistants that perform remote administrative tasks for a range of clients – from VAT returns and self-assessment to payroll and accounting.
Getting caught can ruin a company`s reputation overnight. However, some management teams are willing to take this risk and tolerate the use of creative accounting, as failure to meet Wall Street`s short-term expectations or year-end financial targets can have an extremely negative impact on stock prices. The WorldCom scandal is another striking example of creative accounting leading to fraud. To mask its declining profitability, the company inflated its net profit and cash flow by recording expenses as investments. By capitalizing on expenses, it overstated its profits by about $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss. Creative accounting consists of accounting practices that comply with the required laws and regulations, but deviate from what these standards are designed to achieve. Creative accounting uses loopholes in accounting standards to falsely portray a better image of the company. While creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviors. Practiced by some Hollywood film studios, creative accounting can be used to hide a film`s revenue in order to distort the profit sharing promised to certain participants in the film`s revenues. Essentially, participants in the film`s gross revenues are not affected, but winning participants are shown a deflated or negative profitability figure, resulting in fewer or no payouts after a film`s success. Famous examples of bona fide deception by profiteers include Darth Vader actor David Prowse (with adjusted gross profit of $729 million on Return of the Jedi)[7] and Forrest novelist Gump Winston Groom (with $661 million in gross box office receipts)[8] – both received $0 for their profit-sharing because the films are “in the red.” [9] [8] This form of creative accounting – which is now considered a criminal offense in Japan, where it originated – involves the sale, exchange or any other form of temporary trading of a company`s liabilities with another holding company of the holding company, which was often created exclusively to hide the losses of the first company.
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