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Creative accounting determination and financial reporting quality: the integration of transparency and disclosure.

1. Introduction

What are the effects of creative accounting determinants on financial reporting quality in the banking sector?
To what extent do transparency and disclosure moderate the relationship between creative accounting determinants and financial reporting quality?

2. Theoretical Background

2.1. creative accounting determinants and financial reporting quality, 2.2. the integration of transparency and disclosure, 3. research method, 3.1. study population, 3.2. sampling technique, 3.3. data collection procedures, 3.4. response rate, 3.5. measures, 3.6. analysis and results, 3.6.1. normality, 3.6.2. assessment of measurement model, 3.6.3. assessment of structural equation modeling, 4. discussion, 5. research implications, 6. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, acknowledgments, conflicts of interest, appendix a. measurement items.

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Click here to enlarge figure

Description	No. of Questionnaires	Percentage
Total questionnaires distributed	500	100%
Completed questionnaires received	392	78.4%
Questionnaires uncompleted/with missing data	28	7.1%
Usable questionnaires	364	92.9%

Variables	A	CR	AVE	MSV	MaxR (H)
EI	0.978	0.978	0.901	0.150	0.981
DQ	0.970	0.970	0.866	0.070	0.973
IC	0.965	0.967	0.853	0.155	0.968
OS	0.970	0.972	0.872	0.167	0.972
TD	0.845	0.992	0.970	0.392	0.993
FRQ	0.960	0.883	0.654	0.392	0.887

No.	Relationship	Beta	t-Value	p-Value	Decision
H	EI→FRQ	0.200	3.328	***	Supported
H	DQ→FRQ	0.185	3.427	***	Supported
H	IC→FRQ	0.207	3.640	***	Supported
H	OS→FRQ	0.219	3.912	***	Supported

No.	Relationship	Beta	t-Value	p-Value	Decision
H	TD _X_ EI→FRQ	0.213	5.072	***	Supported
H	TD _X_ DQ→FRQ	0.203	4.954	***	Supported
H	TD _X_ IC→FRQ	0.055	1.403	0.161	Unsupported
H	TD _X_ OS→FRQ	0.230	5.641	***	Supported

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Abed, I.A.; Hussin, N.; Haddad, H.; Almubaydeen, T.H.; Ali, M.A. Creative Accounting Determination and Financial Reporting Quality: The Integration of Transparency and Disclosure. J. Open Innov. Technol. Mark. Complex. 2022 , 8 , 38. https://doi.org/10.3390/joitmc8010038

Abed IA, Hussin N, Haddad H, Almubaydeen TH, Ali MA. Creative Accounting Determination and Financial Reporting Quality: The Integration of Transparency and Disclosure. Journal of Open Innovation: Technology, Market, and Complexity . 2022; 8(1):38. https://doi.org/10.3390/joitmc8010038

Abed, Ibtihal A., Nazimah Hussin, Hossam Haddad, Tareq Hammad Almubaydeen, and Mostafa A. Ali. 2022. "Creative Accounting Determination and Financial Reporting Quality: The Integration of Transparency and Disclosure" Journal of Open Innovation: Technology, Market, and Complexity 8, no. 1: 38. https://doi.org/10.3390/joitmc8010038

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Creative Accounting: Nature, Incidence and Ethical Issues

UPF Working Paper No. 749

19 Pages Posted: 12 Jul 2004

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Catherine Gowthorpe

Oxford Brookes University - Business School

Date Written: April 2004

This paper explores the nature and incidence of creative accounting practices within the context of ethical considerations. It explores several definitions of creative accounting and the potential and the range of reasons for a company's directors to engage in creative accounting. Later the paper considers the various ways in which creative accounting can be undertaken and summarizes some empirical research on the nature and incidence of creative accounting. The ethical dimension of creative accounting is discussed, drawing evidence from several empirical studies. The paper concludes with the analysis of possible solutions for the creative accounting problem.

Keywords: Accounting ethics, creative accounting, earnings management, financial reporting

JEL Classification: M41, M43

Suggested Citation: Suggested Citation

Oriol Amat (Contact Author)

Universitat pompeu fabra - faculty of economic and business sciences ( email ).

Ramon Trias Fargas 25-27 Barcelona, 08005 Spain +34 93 542 16 55 (Phone) +34 93 542 17 46 (Fax)

Oxford Brookes University - Business School ( email )

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Behavioral & Experimental Accounting eJournal

Creative Accounting: A Tool to Help Companies in a Crisis or a Practice to Land Them into Crises

S. Shah , S. A. Butt , M. Ali
Published 2011

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Creative accounting: a brief history and conceptual framework 1, a review of creative accounting practices and its area, technique and ways of prevention, creative accounting- nature, usage, labor and relation with the own crisis consequences in practice in kosovo, creative accounting: developing a model, creative accounting and corporate governance: - a literature review, creative accounting a tool for financial crime: a review of the techniques and its effects, the influence of corporate governance on creative accounting practices in nigeria, role of corporate governance application in practice of creative accounting methods-applied study on listed companies in khartoum exchange☆, creative accounting – some aspects of knowledge and implementation in albania, a study to show the relation between creative accounting and corporate governance, 4 references, the ethics of creative accounting, creative financial accounting : its nature and use, related papers.

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What Is Creative Accounting?

How It Works

Watching for Creative Accounting

The bottom line.

Corporate Finance

Creative Accounting: Definition, Types, and Examples

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Investopedia / Candra Huff

Creative accounting consists of accounting practices that follow required laws and regulations but capitalize on loopholes in accounting standards to falsely portray a better financial image of a company. Creative accounting techniques vary and evolve as regulations change to close the loopholes that allow them.

Key Takeaways

Creative accounting capitalizes on loopholes in accounting standards to falsely portray a better financial picture of a company.
Creative accounting tricks vary in nature and consistently evolve as regulations change.
Getting caught can ruin a company's reputation—and sometimes result in criminal charges, convictions, and prison time.
Investors should always be skeptical and read financial statements from top to bottom for any signs of foul play.

How Creative Accounting Works

A primary benefit of public accounting statements is that they allow investors to compare the financial health of competing companies. But when firms indulge in creative accounting, they often distort the value of the information that their financials provide.

Creative accountants can always find bizarre and novel ways to tweak figures to a company’s advantage. Their goal is to make a firm look as successful and profitable as possible, and sometimes they will go about doing this by twisting the truth. If a gray area in accounting is found, it may be exploited—even if it results in misleading investors.

Getting caught can ruin a company's reputation overnight. Some management teams are willing to run that risk, condoning the use of creative accounting because failure to meet short-term expectations of Wall Street or year-end financial targets can have a hugely adverse impact on share prices.

It is also worth remembering that more attractive figures may lead to higher bonuses for directors, help convince a lender to give a firm a loan and inflate the company’s valuation in the event of a sale.

Types of Creative Accounting

Creative accounting tricks vary in nature and consistently evolve as regulations to police them change. Here are some examples of common techniques :

Overestimating revenues: One of the most common techniques used by public companies looking to artificially boost their income is to prematurely recognize revenue. Revenue recognition is an accounting method that enables companies to recognize sales before they deliver a product or perform a service. It is open to exploitation.
Lowering depreciation charges: Companies often spread out the cost of assets , rather than expensing them in one hit. Methods to reduce annual charges on these items can include extending the useful life estimate of the asset or increasing its assumed salvage value .
Delaying expenses : Deferring the recording of current period expenses, such as payments to suppliers and rent, to a subsequent period makes current period earnings look better.
Masking contingent liabilities : Failure to record potential liabilities that are likely to occur—and underestimating how much they are likely to cost—can boost net income or shareholders' equity .
Undervaluing pension liabilities: Pension obligations can easily be manipulated because the liabilities occur in the future and company-generated estimates need to be used to account for them.
Inventory manipulation: Inventory represents the value of goods that were manufactured but not yet sold. Overstating the value of inventory will lead to an understatement of the cost of goods sold , and therefore an artificially higher net income, assuming actual inventory and sales levels remain constant.

Real-World Examples of Creative Accounting

In the 1990s, energy, commodities and services company Enron Corp. engaged in all sorts of unethical accounting practices . It hid debt, understated losses and manipulated various financial figures to create an illusion of profitability, before filing for bankruptcy in 2001. Twenty-two executives pled guilty or were convicted, and a number went to prison for lengthy terms.

The WorldCom scandal is another high-profile example of creative accounting leading to fraud. To hide its falling profitability, the company inflated net income and cash flow by recording expenses as investments. By capitalizing expenses, it exaggerated profits by around $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss. Among others, the former CEO and CFO were sent to prison.

In the wake of the Enron and WorldCom scandals, among others, the Sarbanes-Oxley Act (SOX) was enacted in 2002 to deter fraud and require greater transparency of public companies.

Analysts , asset managers , and financial journalists failed to see many of the above scandals coming, proving that it is not always easy to spot questionable accounting practices. However, that does not mean that investors should sit back and do nothing. Being skeptical and reading financial statements a little more closely, rather than just focusing on what management highlights, can go a long way to detecting suspicious activity.

A good starting point is to carefully read company footnotes , assess the reliability of auditors , and pay careful attention to any unusual variations in figures.

What Are Examples of Creative Accounting?

Examples of creative accounting include overestimating revenues, lowering depreciation charges, and delaying expenses. Other common examples include underestimating potential liabilities, undervaluing pension obligations, and manipulating inventory.

Is Creative Accounting Legal?

Creative accounting is legal in that it exploits loopholes in laws and regulations. But it can ultimately lead to accounting fraud , which is illegal and was the case in the Enron and WorldCom scandals.

What Are U.S. Accounting Standards?

Generally accepted accounting principles (GAAP) are used in the United States for preparing financial statements. Outside of the U.S., companies follow the International Financial Reporting Standards (IFRS) .

Creative accounting takes advantage of loopholes to falsely portray a company’s financial health as better than is actually the case. While creative accounting is legal, it can lead to accounting fraud, which is illegal. Extreme examples include the Enron and WorldCom scandals.

Texas State Historical Association. “ Enron Corporation .”

U.S. Securities and Exchange Commission. " SEC Charges WorldCom With a $3.8 Billion Fraud ."

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Journal of Financial Crime

ISSN : 1359-0790

Article publication date: 14 April 2020

Issue publication date: 23 April 2020

The purpose of this paper is to study the concept and procedure of creative accounting as how is it worked around and how it can lead to financial crimes. The procedure which are followed and which are the people who are involved and who are the victims of such crimes. The methods which are used to perform the action and how is it done. What are the findings of different researchers who have studied the same concept and how can it be curbed is the main purpose of the paper.

Design/methodology/approach

This paper is designed to find out the working of accounting policies and how the loopholes in the same can actually be taken into account, resulting in a certain number games which can be played around it, and to get the desired outcome in the preparation of financial statements.

Creative accounting, though legal and acceptable around the world, gives in the way to loopholes provided by the acts and rules governing the preparation of financial statements and eventually leading to financial crimes and hampering the economy as a whole.

Research limitations/implications

The limitations of this study remain to the fact that it is an empirical study, as a lot of papers and articles were studied before giving it a shape and reaching a conclusion.

Practical implications

Creative accounting though not illegal but the excess use of the same has given daunting effects on the financial statements and as a result have resulted into financial frauds and looting of peoples money throughout the world.

Social implications

Hard-earned money of the investors is looted and no action can be taken against as the mechanism and the legal bodies are still struggling to curb the problem, and thus it is very important to learn about creative accounting.

Originality/value

This study leads to the understanding of the growth of creative accounting and how it has resulted in accounting frauds leading to financial crimes in an economy.

Financial crimes
Financial frauds
Creative accounting
Financial statements

Gupta, C.M. and Kumar, D. (2020), "Creative accounting a tool for financial crime: a review of the techniques and its effects", Journal of Financial Crime , Vol. 27 No. 2, pp. 397-411. https://doi.org/10.1108/JFC-06-2019-0075

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Creative accounting – Motives, techniques and possibilities of prevention

January 2019

Zagreb School of Economics and Management

Čevizović Ivan j.t.d.

University of Osijek

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