The Struggle against Creative Accounting: Is "True and Fair View" Part of the Problem or Part of the Solution?

Creative accounting is a growing issue of interest in Spain. In this article we argue that the concept true and fair view can limit or promote the use of creative accounting depending upon its interpretation. We review the range of meanings that true and fair view can take at an international level and compare the experience of the United Kingdom with the Australian one by analysing the use of true and fair view to limit creative accounting. Finally, we suggest lines of action to be considered by the Spanish accounting standards-setting institutions.

There are several definitions for creative accounting. For example, Naser (1993) from an academic point of view offers the following definition:

“Creative accounting may be defined as:

- the process of manipulating accounting figures by taking advantage of the loopholes in accounting rules and the choices of measurement and disclosure practices in them to transform financial statements from what they should be, to what preparers would prefer to see reported, and

- the process by which transactions are structured so as to produce the required accounting results rather than reporting transactions in a neutral and consistent way” (p. 59)

If we explore this definition we find that some interesting assertions are implied. By saying that creative accounting transforms accounts from what they 'should' be it is implied that there is some absolute truth in accounting that could be achieved if only the rules were applied impartially. Similarly there is a reference to an idea that transactions should be reported in a 'neutral and consistent' way, the term neutral again implying a need for impartiality.

Most commentators view creative accounting with distate. In this line, Griffiths (1985) or

Jameson (1988) who indicates:

“Let there be no doubt about it, creative accounting is a bad thing. It distorts company results and financial position and, if the theorists are to be believed is likely to become increasingly common" (p. 20).

Smith (1992) illustrates his contention that creative accounting is a serious problem with case studies of three UK listed companies, which collapsed shortly after presenting accounts that seemed to indicate financial strength. The author argues:

“These three large corporate collapses all owe their occurrence in some respects to techniques of creative accounting or financial engineering" (p. 9).

In a study carried out by Leung and Cooper (1995) to 1.500 accountants in Australia, highlighted that creative accounting is considered one of the major ethical problems of the accounting profession. Table 1 shows that 50,1% of respondants stated that the problems of manipulation n of financial information by clients, presented an ethical problem for accounting professionals.

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