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Creative Accounting (1).pptx
- 1. Creative accounting Digital transformation of accounting
- 2. Creative accounting Creative accounting, also called aggressive accounting, is the manipulation of financial numbers, usually within the letter of the law and accounting standards, but very much againstheir spirit and certainly not providing the “true and fair” view of a company.
- 3. A typical aim of creative accounting will be to inflate profit figures. Typical creative accounting tricks include off balance sheet financing, over-optimistic revenue recognition and the use of exaggerated non-recurring items. The techniques of creative accounting change over time. As accounting standards change,the techniques that will work change. Many changes in accounting standards are meant to block particular ways of manipulating accounts, which means those intent on creative accounting need to find new ways of doing things. Window Dressing has similar meaning when applied to accounts, but is a broader term that can be applied to other areas. In the US it is often used to describe the manipulation of investment portfolio performance numbers. In the context of accounts, “window dressing” is more likely than “creative accounting” to imply illegal or fraudulent practices, but it need to do so. Any creative accounting techniques change the main numbers shown in the financial statements, but make themselves evident elsewhere, most often in the notes to the accounts.
- 4. OBJECTIVES OF CREATIVE ACCOUTING Increased Profit Management Motivation Seeking Promotions Takeover and Acquisitions Other Objectives: • To keep the company's financial results within agreed limits set by creditors, • To fulfill public listing requirements, • To help negotiations with regulators, • To pay less tax, • To push the company towards insolvency.
- 5. METHODS OF CREATIVE ACCOUNTING • Many annual and quarterly reports and presentations dive heavily into theoretical scenarios where one time “charges” to earnings are excluded.This practice is called reserving. • Banks are able to lend out most of the money they receive in deposit.The banks can also can lend money they borrow from other banks. However, to protect against bad loans, banks must keep aside a stash of money called a “reserve”. • One of the main genres of “creative accounting” is known as slush fund accounting, whereby some earnings from this quarter are hidden away just in case the profit from next quarter is not enough for the management to make their bonuses.
- 6. PREVENTION OF CREATIVE ACCOUNTING ▪ To prevent creative accounting, the experts opine that accountants and manager should divide the duties of an internal control checklist. ▪ The company has to adhere strictly to the ethical values it has set itself with the long-run and the short-run of the life of the company.The accounting and accounting practices have to be consistent and show to the investors that it is following the ethical practices in all its financial dealing as well as reporting. ▪ Decrease allowable accounting method or fix method used in different condition so that scope for choosing accounting method can be narrow downed. ▪ Implementation of “Substance over form” can decrease artificial transaction and this can make linked transaction become one as whole.
- 7. CONTINUATION ▪ 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. ▪ ethical standards and governance codes must be properly executed to avoid individuals from performing creative accounting.
- 8. THANK YOU