The term “creative” applied to something means that it exists or can invent. it is assumed that creative accounting has the ability to create or invent information.
The Creative accounting is a path that a company can take to become attractive in the stock market.
In Creatve accounting, we adopt a strategy to obtain investments from third parties or obtain bank financing. And the financial statements were created to achieve the goal and bring some benefits to the company. But without the expertise of an experienced accountant, there are huge chances of mistakes like the company may fail to represent the financial reports of the business economic activities. Although they are following accounting standards and rules.
This situation can occur by the use of excessively high or low accounting estimates or by structuring a transaction to achieve the goal in accounting reporting. Through this, the company can obtain short-term benefits, but in the long term and with constant practice, the consequences can be quite negative. So, this is necessary to have a full expert and experienced accountant for your business to achieve objectives and goals.
Objective of Creative accounting
The objective of Creative account is divided into three broad categories in each of them, there is the application of specific practices:
- improve the displayed image;
- stabilize the image over the years;
- weaken the demonstrated image.
This tactic gives profit to the company for the short term as it allows to increase the share values but at the same time, it reduces the cost of capital, as the strategy demands low investments.
Reasons for the use of creative accounting
There are multiple reasons for the use of creative accounting. Among the reasons the following are highlighted:
Maintaining a constant flow of receipts: The creative accounting allows to reflect a standard trend of growth of receipts
Maintain high or low stock: The mechanisms used in creative accounts that apparently reduce or divide or increase more receipts and results.
Check the information on the financial market: A creative accounts can also be used to delay the disclosures of results achieved and other financial data that gives benefit to some investors who have privileged access to such information.
Masking or government performance: The creative account can be used for masking or government performance.
Is Creative Accounting Worth It?
In the long run,it may be dangerous for the company but, if you gain an advantage in short-term vision then the managers may decide to engage in creative accounting.
Benefits of creative accounting
It can be used to achieve some benefits, some of them are:
- It helps businessesto set the required parameters
- By showing a smooth and growing graph of the business, you can easily attract investors.
- The investor helps you in your future for gaining profit for your business. So in this way the creative accounting help in your business.
- The company can conceal the financial risk for a short period, which they may tend to suffer through creative account techniques.
Disadvantages of creative accounting
Loss of investors: The business is always in a position to lose his investor in case if the investors understand the manipulations, and know the fact that it will not be good for the business.
Reputational risk: In the long run, there are also the chances that the company may lose its business by the practices of creative account techniques.
Creative accounting Techniques is sometimes treated as illegal when books of accounts are unethically or illogically misrepresented by the accountant.
The bigger disadvantage is, the company must have to hire an expert that does the account book manipulation otherwise, a financial literate director or CEO makes changes that are harmful to the business. So, this adds up the cost of hiring a financial expert.
How is creative accounting developed?
It is a way to manipulate the equity reality of an entity and prepare the financial statements by using the existing flexibilities and omissions in accounting standards.
What are the errors in accounting?
There are many errors that occur in accounting that can end your business. Some of them are:
- error in invoices.
- Less experienced accountant.
- Leave tax planning aside.
- Error in calculations.
- Mix personal and business finance.
- Error in documenting and analyzing results
- Manually handle and perform the task.
Is creative accounting is a crime?
This type of accounting is a crime when important company information and document are modified and manager fails to search and make the payment of certain taxes that is mandatory. In such a case, their a risk of being fined by the IRS for tax evasion.
What is the objective of creative accounting?
The objective of creative accounts techniques vary and can be:
- Increase in a company asset
- can get the loan on good rates
- bank financing
- Third party investment.
Where is the term creative accounting derived from?
The word ‘accounting’ comes from the noun ‘account that is derived from the Old French word ‘acont’ meaning ‘account, or terminal payment. ‘ and the term “Creative Accounting” results from the translation of the English expression “Creative Accounting” and its appearance occurred in the 80s.
What are the reasons for creative accounting?
To obtain personal gain for increasing capital, attracting investors and buying time for debts is the main reason to use such type of accounting.