The Ethics of Creative Accounting

Introduction

The term 'creative accounting' can be defined in a number of ways. Initially we will offer this definition: 'a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business'.

To investigate the ethical issues raised by creative accounting we will:

· Explore some definitions of creative accounting

· Consider the various ways in which creative accounting can be undertaken.

· Explore the range of reasons for a company's directors to engage in creative accounting.

· Review the ethical issues that arise in creative accounting.

· Report on surveys of auditors' perceptions of creative accounting in the UK, Spain and New Zealand.

Definitions

Four authors in the UK, each writing from a different perspective, have explored the issue of creative accounting. Ian Griffiths, writing from the perspective of a business journalist, observes:

Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order to protect the guilty. It is the biggest con trick since the Trojan horse. . . In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting. (1986:1)

Michael Jameson, writing from the perspective of the accountant, argues:

The accounting process consists of dealing with many matters of judgement and of resolving conflicts between competing approaches to the presentation of the results of financial events and transactions... this flexibility provides opportunities for manipulation, deceit and misrepresentation. These activities - practised by the less scrupulous elements of the accounting profession - have come to be known as 'creative accounting'. (1988: 7-8)

Terry Smith reports on his experience as an investment analyst:

We felt that much of the apparent growth in profits which had occurred in the 1980s was the result of accounting sleight of band rather than genuine economic growth, and we set out to expose the main techniques involved, and to give live examples of companies using those techniques. (1992:4).

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