Question

In producing the Conceptual Framework and some of the current MFRS, the MASB has had to address the potential problem that the management of some companies may choose to adopt inappropriate accounting policies. These could have the effect to portraying an entity's financial position in a favourable manner. In some countries this referred to as "creative accounting".

Required : Describe in broad terms common ways in which management can manipulate financial statements to indulge in 'creative accounting' and why they would wish to do so.

(10marks)

Answer 1

Common ways in which management can manipulate financial statements to indulge in 'creative accounting' :

1. Manipulation of off balance sheet financing items

2. changes in accounting policies and depreciation methods

3. manipulation of other income and expense items

4. changes in the value of money

5. overestimation of revenues by recording fictitious sales revenues

6. manipulation of receivables write-offs

7. manipulation of accruals

Why would they wish to do so?

1. obtaining personal gains

2. competition

3. attracting investors

4. buying time for not settling debts

5. increasing or maintaining the level of capital