Q:

What are some creative accounting examples?

A:

Quick Answer

Creative accounting refers to any accounting practice that is technically correct but deviates from how accounting policies were intended to be used. In general, creative accounting capitalizes on loopholes in generally accepted accounting principles in order to disguise financial performance, such as by keeping debt off a balance sheet.

Continue Reading

Full Answer

The sorts of accounting irregularities that are often seen as creative accounting may be technically permitted but in general are frowned upon and often indicate fraud. Creative accounting is also referred to by the slang phrase “cooking the books,” implying that these practices require falsification and omission in the presentation of company financial records. While unfortunately common and occasionally harmless, professional accountants are cautioned against resorting to these sorts of practices.

The Enron scandal is one of the most prominent examples of creative accounting. In 2001, the U.S. corporation Enron filed for bankruptcy as a result of fraudulent, deceptive accounting practices that were ongoing throughout the 1990s. The company masked debt, under-reported losses, and manipulated their financial reports in order to create an illusion of profitability. Arthur Anderson, the now-defunct public accounting firm in charge of the company’s annual audit, played into the deception, allowing Enron to continue on with their illegitimate accounting practices.

Another significant example is the WorldCom scandal, in which the company improperly categorized telecommunications expenses as capital expenses, rather than ordinary expenses, and inflated revenue using bogus accounts in order to disguise losses and maintain its position in the market.

Learn more about Accounting

Related Questions

  • Q:

    What is job order costing?

    A:

    Job-order costing is an accounting method that determines the cost of material, labor and manufacturing overhead used to create a product. This technique is employed by businesses that produce different kinds of goods or services within a specified time frame.

    Full Answer >
    Filed Under:
  • Q:

    What are some common accounting terms and their meanings?

    A:

    One common accounting term is materiality, which is the measure of how significant a piece of information is to the important financial decisions within a company. Material information includes any relevant information regarding business decisions, and accountants must include all material information on financial statements.

    Full Answer >
    Filed Under:
  • Q:

    Where can you find definitions of accounting terms?

    A:

    Definitions of accounting terms are found on business and educational websites, such as AccountingCoach.com and InverstorGuide.com. These two websites have search engines where visitors are required to type in various terms used in accounting to find their definitions.

    Full Answer >
    Filed Under:
  • Q:

    What are some basic accounting courses?

    A:

    There are several types of basic accounting courses, including courses in financial accounting, managerial accounting, accounts payable and accounts receivable. Colleges such as Kutztown University of Pennsylvania offer several online basic accounting courses, such as Creating a Profit and Loss Statement and Preparing a Balance Sheet. Basic industry oriented accounting courses include Introduction to Financial Management and Accounting offered at the Massachusetts Institute of Technology, and Corporate Finance for Healthcare Administrators offered at the University of Michigan.

    Full Answer >
    Filed Under:

Explore