- Contemporary Issues in Accounting - Research Report
- Question 1 Write a research report on ‘creating accounting’ referring to various scandals involving creative accounting as well as using the underlying concept of Positive Accounting Theory (PAT)
- Question 2 Prepare a discussion report on the importance of Codes of Ethics for Professional Accountants (APES 110) in addressing the issues of creative accounting
Contemporary Issues in Accounting - Research Report
Referring to the role of the creative accounting in the financial scandals there are some of the world-renowned cases that will be highlighted and briefly discussed in the below-mentioned segment:
One of the most well-known cases with regards to the involvement of the creative accounting is the WorldCom Scandal. According to Gherai and Balaciu, 2011, been observed that the assets became inflated by approximately $11 billion that cost a lot as more than 31,000 employees lost their jobs and more than 181 billion was lost by the investors. The CEO was the main culprit for making this specific scandal as he underreported the line costs rather than expensing he capitalized everything and then the CEO inflated each and every revenue with the false accounting entries. Furthermore, the company got caught and came into the limelight when the internal auditing in WorldCom took place and the internal auditing at that point found out that more than $3.9 million was held by trickery. There were also several penalties that they had suffered like, the CFO was fired from his job and following that the controller of the company also resigned from his immediate position. Additionally, it was also noticed that the firm also declared itself as bankrupt. As per Duska, Duska, and Ragatz, 2011, The CEO of the company was sentenced 25 years in jail due to the fraudulent activities and also for filling wrong documents with regards to the regulators. The second scandal is the Enron Scandal and the scandal came into the limelight in the year 2001. According to Bhasin, 2016, the company was born in the year 1985 and it was also among one of the topmost firms in America that employed more than 21000 employees in 40 countries across the globe. It has been noticed that Enron mainly used the clever tactics related to the creative accounting for lying about their profits. The shareholders were reported to lose their $75 billion money and there were also a large number of employees as well as investors who completely lost their retirement accounts with the company. The main guilty of this scandal was two of the ceos of the company they kept a huge amount of debts off their company's balance sheet. Other tricks that the company did by using some of the methods of creative accounting are as follows: The CEO manipulated the reserve accounts for maintaining the arrival of the continual earnings, the energy market of California was also manipulated by them, the foreign governments were also bribed for winning several contracts in other countries, and they also build up Special Purpose Entities for moving the liabilities and assets from the balance sheet. The company was caught red-handed by their internal whistleblower Sherron Watkins as the high stock prices had inflamed the suspicions.
As stated by Bhasin, 2016, the third scandal is in the Health South Corporation that took place in the year 2003 again following some of the bad and controversial tactics of creative accounting. Once upon a time, it was regarded as one of the biggest and world-renowned largest publically held healthcare company in the entire U.S. It was discovered that for meeting the expectations of the potential investors the firm boosted/magnified their income by more than $1.5 billion. Throwing light on the above-mentioned statement it can be also stated that it was also highlighted that from the year 1996 itself the firm has engaged themselves in the accounting practices that were totally fraudulent in nature and boosted up their revenues by 4800 percent. However, they were caught by when they tried to sell $76 million stock in one day before the firm dealt with the huge amount of loses the SEC suspected them so they took the necessary actions against them and everything was revealed within a day. In this scenario, the main culprit was again the CEO of the company and he was only sentenced 7 years in the jail. The fourth scandal is American Insurance Group Scandal that took place in the year 2005. It is also the company that engaged themselves in the biggest accounting fraudulent activities by using some of the tactics with regards to the creative accounting.
Firstly, Integrity: According to Shafer, 2015, a professional accountant should be honest and straightforward no matter whatever the situation is with regards to their business and professional relationships. Secondly: Confidentiality: It is regarded as one of the most vital elements and it is strongly taught to the professional accountants that they must always respect the confidentiality of the information that is received by them as a result of their business and professional relationships and it should not be under any grounds disclosed to an unknown person without any valid or legal right to disclose. On the other hand, the information that is completely confidential in nature should not be used by the accountant for their personal profit. Thirdly, Objectivity: It is also recommended to a professional accountant that they should not allow any kind of conflict of interest, the bias of the other people for revoking business and personal judgments. Fourthly, Professional Behavior: It is one of the first and also one of the prominent elements with which an accountant should always comply with regards to the regulations and rules and should avoid any kind of actions that do not come under the proper accounting ethics. Fifthly, Professional Competence and Due Care: It is one of the ethics that teaches a professional accountant has continuing duty that should be maintained by them and they should also use their relevant skills for ensuring that an employer or client receives a proper professional service that is totally based on the recent developments in practice, techniques, and legislation.
It has been already discussed in the above-section that creative accounting can be good for an organization if it is used in a correct manner but the creative accounting also has a tendency to portray the financial situation of a business either in a worse or in a better way than the actual situation. In many of the cases, it has been also witnessed that the practice of the creative accounting in some of the segments of the business also remains quite questionable in nature. Some of the revelations of the creative accounting also suggests that it is quite a fraud in nature and can easily destroy a well-known image of a business also to a great extent. Below mentioned are some of the codes of ethics with regards to the accounts that are used by the professional accountants for addressing the issues that completely arises from the creative accounting are as follows:
Firstly, by using one of the important elements of the important elements of Code of Ethics for Professional Accountants that is professional behavior the professional accounts try to segregate the functions. It is regarded as one of the simplest methods that can be used for controlling and addressing the issues related to the creative accounting. It is strongly recommended that a business can appoint an internal bookkeeper for managing their day-to-day transactions but they must use the CPA for preparing a financial statement every month and reviewing their transactions related to the bank. The same type of approach is also completely applicable for the bug multinational corporations across the globe. Secondly, by using the Professional Competence and Due Care a professional accountant can also create an ethical environment. Ethics is one of the main components of a business and if somehow it lapses then the business tend to suffer completely. It has been witnessed that a large number of companies often uses the creative accounting in their business culture and for this; the employees and the management of the company do not demonstrate or emphasize any kind of ethical behavior. The professional accountants always strive to create an ethical environment by using their proper skills they try to explain the managers and other employees about the consequences that they might face if they do not consider any kind of ethical environment. Using the ethics for the professional accountants there can be more ethical choices in a company and the company can also make honest discussions with their potential consumers when some things go wrong they do not need to hide from their consumers and model behavior can also be set by the companies which the employees would love to follow so that they do not disrespect ethics on any grounds. Thirdly, using the Code of Ethics can also serve as one of the key elements for forcing a company to create their formal policies along with the penalties. It has been noticed that companies that use creative accounting in a wrong manner face the negative consequences in terms of heavy penalties. The penalties and formal policies in an organization will directly serve as a mechanism for correcting the worker's behavior that degraded the policy of the company with some kind of punishment. If a worker does not believe in the authenticity of the prohibition with regards to the creative accounting. The penalties and the formal policies will also provide a strong ground for letting a worker go. The worker may not wish to continue using the creative accounting practices in the organization once they have been punished. According to Adrian, Ramona, and Romulus, 2012, the external audits can also be a very good medium that can prevent the unauthorized use of the creative accounting. Throwing light on the above-mentioned statement it can be said that the external auditors who have gathered a reasonable amount of experience in this field can detect the creative accounting more quickly. On the contrary, even if the auditors are unsuccessful in detecting the creative accounting but external audits can be quite helpful in this matter as it can serve as a psychological obstacle. If creative accounting can be determined then some of the members of an organization can easily assume the reasons behind the fraudulent behavior and activities by the individuals.
Bhasin, M.L., 2016. Creative Accounting Practices at Satyam Computers Limited: A Case Study of India’s Enron. International Journal of Business and Social Research, 6(6), pp.24-48.
Bhasin, M.L., 2016. Survey of Creative Accounting Practices: An Empirical Study. Wulfenia Journal KLAGENFURT, 23(1), pp.143-162.
Brooks, L.J. and Dunn, P., 2011. Business & professional ethics. New York: Cengage Learning.
Duska, R., Duska, B.S. and Ragatz, J.A., 2011. Accounting ethics. London: John Wiley & Sons.
Gherai, D.S. and Balaciu, D.E., 2011. From creative accounting practices and Enron phenomenon to the current financial crisis. Annales Universitatis Apulensis: Series Oeconomica, 13(1), p.34.
Rajput, M.S., 2014. Creative accounting: some aspects. International Journal of Business and Administration Research Review, 2(4), pp.193-199.
Shafer, W.E., 2015. Ethical climate, social responsibility, and earnings management. Journal of Business Ethics, 126(1), pp.43-60.
Yadav, B., 2014. Creative accounting: An empirical study from professional prospective. International Journal of Management and Social Sciences Research, 3(1), pp.38-53.