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1. Creative accounting
P re s e n t e r t o D r . M o h a m e d Ta re k
p ro v i d e d b y I b ra h i m R a a fa t

2. Introduction
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In the accounting world, the general rule is
that accounts should give a true and fair
view. Generally, an accountant has a
professional responsibility to comply, a
corporation has a legal responsibility to
comply, and auditors have a legal
responsibility to give some sort of opinion on
compliance, yet frequently this all goes out
of the window. Frequently, accountants and
businesses are motivated to produce
accounts that don't show a true and fair
view. Not only this, but auditors rely on
sampling and somehow fail to spot there is a
problem.

3. Definition of
creative accounting
Creative accounting consists of accounting practices that
follow required laws and regulations, but deviate from what
those standards intend to accomplish. Creative accounting
capitalizes on loopholes in the accounting standards to falsely
portray a better image of the company. Although
creative accounting practices are legal, the loopholes they
exploit are often reformed to prevent such behaviors .. , but
deviate from the spirit of those rules with
questionable accounting ethics—specifically distorting results
in favor of the "preparers", or the firm that hired the
accountant.[1] They are characterized by excessive
complication and the use of novel ways of characterizing
income, assets, or liabilities, and the intent to influence
readers towards the interpretations desired by the authors.
The terms "innovative" or "aggressive" are also sometimes
used. Another common synonym is "cooking the books".
Creative accounting is oftentimes used in tandem with
outright financial fraud (including securities fraud), and lines
between the two are blurred. Creative accounting practices
are known since ancient times and appear world-wide in
various forms.[1]
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What is the Objective of Creative Accounting?
A typical creative accounting incident involves both human effort and a bias towards some objective;
Increased Profit
Most typically the objective is increased profits, inflated asset values, understated liabilities, and
overstated shareholder value.
Management Motivation
The motivation of management and accountants typically is bonuses, promotions, salary rises, etc.
Seeking Promotions
There can be other objectives of creative accounting. Most managers and accountants perform a
given role for two or three years before seeking a promotion. Therefore throughout that period, they
are motivated to show increases in profitability (year-on-year growth). This results in a form of
creative accounting that smooths out income and costs so that the result over the two or three-year
period is a growth in profits.

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Takeover and Acquisitions
Takeovers and acquisitions also create opportunities for creative accounting. In the year of the takeover,
the new management and accountant have a bias to show a dismal picture - low profits, deflated asset
values, inflated provisions, and perhaps an impacted stock value (as a result of the poor results if they are
made public). Then in the years proceeding the takeover, the assets can be re-inflated, and provisions
released, all contributing to increased profits and a perception that the new management is doing a great
job.
The above technique may also be used before a management buy-out. This helps the new buyers
negotiate a lower purchase price, and increases their return after the buy-out.
The aim of creative accounting is to make the company look better than it is. The creative accountant
manipulates the positioning of assets, liabilities, etc. A creative accountant does not provide a ‘true and
fair’ view of a company. That is what honest and ethical accountants should do.
What is the Objective of Creative Accounting?

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Techniques of
creative accounting
Creative accounting is actively applied in six areas. The
first area is regulatory flexibility, whereby changes in
accounting policy are permitted by accounting
regulation. For example, IAS permits carrying non-
current assets can be recovered at either revalued
amount or depreciated historical cost in asset
valuation. The Second area is the dearth of regulation
by which some accounting treatments might not be
fully regulated as there are few mandatory
requirements. The third area is management has a
large extent of estimation in discretionary areas, such
as assumption in bad debts provision. Fourthly, some
transactions can be timed to show the desired
appearance in accounts. For example, the manager is
free to choose the timing to sell the investment just to
increase earnings in the accounts. Fifthly, to
manipulate balance sheet amounts by using artificial
transactions. Last but not least, by reclassification and
presentation of financial amounts through balance
sheet manipulation in order to smooth financial
ratios and also based on a cognitive reference point in
financial numbers’ presentation. 6

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Using of Creative Accounting
Creative accounting is a method used to make or
interpret accounting policies falsely to misuse the
accounting techniques and standards being set by
the accounting bodies. It is an exploitation of
loopholes in our accounting system and audit
system after the accounts are finalized.
Creative accounting plays a significant role in
financial reporting but it has been negatively
correlated which means more managers involved
in it may decrease the value of financial
information, this study aims to shed light on the
impact of creative accounting ethics techniques on
the reliability of financial ...
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Misstating
revenue
Messaging
expense
Concealing
bad news
Misstating
assets
Methods of creative
accounting

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Advantages of Creative Accounting
• Creative accounting helps a business to set
the required parameters, which is
practically impossible. The business can
show a smooth and good growing graph. In
order to attract investors, the management
adopts this technique to show steady
profits and good revenue.
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• Creative accounting is a set of
opportunistic accounting practices
deliberately developed by
Management in order, without
altering the composition of the
Equity, to issue Financial Statements
that provide an image of the
company similar to that desired by
Management, taking advantage of
the explicit or implicit flexibility that
allows accounting regulations.
• Reduce assets such as
inventories, customers or fixed assets with
excessive depreciation or provisions.
• Reduce inventory with changes in valuation
criteria.
• Reduce reserves and/or the result for the year.
• Hiding sales or raising expenses to reduce
profit.

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Disadvantages of Creative Accounting
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• Reputational risk: In the long run, in case if this is disclosed that
the company does a creative accounting practice, then the
expectation from the company by their clients will also be at
risk; thus, the company may lose its business and dearly earned
a reputation
• Creative accounting plays a significant role in financial reporting
but it has been negatively correlated which means more
managers involved in it may decrease the value of financial
information, this study aims to shed light on the impact of
creative accounting ethics techniques on the reliability of
financial

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Conclusion
Creative accounting is an accounting practice that helps the company
deviate from the profits and revenues for the year by following rules
and regulations. It is a skill that experts use to manipulate company
accounts. The experts best handle the loopholes in the system, and
the method should be ethical; otherwise, it can be a severe problem
for the company’s management.
The most important thing here is that investors should be cautious
while choosing investment companies. They should know the
financial arrangements, which are possibly done by understanding
the notes to the accounts. The management should ask about any
suspicious item, and if the management cannot answer the query, the
investor should not invest their money in these bogus companies.

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Examples of Creative Accounting
Booking less
expense
Wrong estimation
of inventory in
stores
Manipulating
revenues and sales
figures
Failures to make
proper contingent
liabilities
Lowering personal
liabilities of
company

12. Thank you