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Concept
Creative accounting
Summary
Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, 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. 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. The term as generally understood refers to systematic misrepresentation of the true income and assets of corporations or other organizations. "Creative accounting" has been at the root of a number of accounting scandals, and many proposals for accounting reform—usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added.
Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of "accounting irregularities" at Enron, Worldcom, and other firms in the United States. According to critic David Ehrenstein, the term "creative accounting" was first used in 1968 in the film The Producers by Mel Brooks, where it is also known as Hollywood accounting.
The underlining purpose for creative accounting is to "present [a] business in the best possible light" typically by manipulating recorded profits or costs.
Official source
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