Creative Accounting and Earnings Management Essay

Creative Accounting and Earnings Management - Essay Example According to the research findings it can therefore be said that financial statements are prepared by managers of a company or enterprise to represent the true and fair view of the affairs of the company. They are then used by the shareholders and other users of financial statements for the decision making process. It is a very critical part of financial accounting because it provides information for the users of financial statements to interpret and come to a conclusion about the performance of the company. Creative accounting practices are such malpractices in accounting which may be legal and in accordance with the existing accounting standards but may not be in line with the true spirits of the rules laid down under accounting standards. In other words, when financial statements are prepared by the relevant managers of a company that is inconsistent with the purpose or intention of the existing accounting standards, then it is said to be a practice of creative accounting. The man agers do so by taking advantage of the flexibilities available in the letter of the rules in accounting standards practices. Earnings management is a term which acts as a substitute for creative accounting. Trying to manipulate the earnings which are reported by the managers of a company, by taking help of some specific accounting process, is termed as earnings management. The company does so to influence its earnings in a short term horizon. Earnings management makes use of accrual accounting.... The accounting standards are revised often to help fill its loopholes. More and more regulatory measures are taken to keep a track on how the financial information is reported by the firms. These measures taken are proving quite effective in preventing current creative accounting practices, but the question is whether it will be able to stop these malpractices completely or not. It is indeed very difficult to put an end to creative accounting in future (Keupp, 2002, p.1). Key Elements of Creative Accounting It is not very easy to precisely define creative accounting. Still, three elements can be regarded as key elements of creative accounting. They are: a. Flexibility: Accounting is always associated with flexibilities present in it. While accounting, one can use their discretion to choose their own preferred way of recording sales or turnover of the company, the method of depreciation to be used by the company, the method of valuation of inventory, etc. This type of flexibility help s the managers of a company to represent the true and fair view of the company’s affairs and its earnings in the financial statements. However, in practice the case may be quite different. These flexibilities in the hands of managers can be used by them to present the company’s performance in a more favourable way than what it is in reality. These methods can be applied by staying within the regulatory framework. b. Account Management: Accounting policies can be utilized by the managers of a company to accomplish the objectives of the management of the company and may not fulfil the essential requirements of the users. It can thus be used as a tool that can be managed and not as a means to