Speaking notes on Creative Accounting 1 PDF

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Speaking notes on Creative Accounting ( Group – 45 ) Name Bandana Thapa Baniya Sarmila Maskey Raj Pokhrel Geeta Timilsina Adhikari

Student Id 522188 521081 519371 537300

1. Speaking Note: (Bandana Thapa Baniya) Hello everyone, this is me Bandana Thapa Baniya. Today, our group is going to give presentation on Creative accounting. I am going to introduce you about creative accounting and its types. Before defining and explaining about creative accounting, firstly let us discuss about its background. Creative accounting had been the topic of discussion since from the past and being interesting topic to discuss in recent time because it is the art of accounting which shows the best financial position of the entity to the external parties and investors. Creative accounting allows the accountants to manipulate the data for the benefit of the company although the reliable and valid financial condition of organisation plays a remarkable role in decision making process. According to Remenaric (2019) Creative accounting arises in a business field in order show the attractive image of the company to attract investors. Creative accounting is one a significant technique and methodology to maintain the viability and long run of the organisation. Creative accounting is the art of accounting knowledge, procedure, rules and laws that are implemented and manipulated to show the better financial condition of organisation then it really is. Main objective of creative accounting is to make the company appear financially healthier than it is. Liberto (2019) defines creative accounting as accounting practises with rules and regulation but have some deviations from accounting standards, it capitalizes loopholes in accounting standard to reflect the better image of the organisation. Similarly, Hussein, Kasim and Arumugaum (2013) defines creative accounting as the communication between entities and shareholders focusing on recognizing loopholes which alter the financial condition of organisation. Likewise, Yadav, Kumar and Bhatia (2014) explains creative accounting as purposeful intervention with the intension of obtaining some exclusive gain. There are different types of Creative accounting 1. Overestimating revenues Public sectors implement the overstating revenue technique to magnify their income artificially and accept them as a premature revenue. Overestimating revenue is the accounting tool which enables company to acknowledge sales before they perform the service, which is an open exploitation done for the gain of revenue.

2.Lowering depreciation charges Companies explore their assets hiding the expenses like extending useful life of asset or increasing the salvage value of assets. 3.Delaying expenses Delaying in payments like rent expense, payment to suppliers show a good financial position of the organisation at that period of time. 4.Masking contingent liabilities Company Fails to record potential liabilities that are likely to happen, which finally uplift net income and shareholders’ equity of the company. 5. Undervaluing pension liabilities Since pensions are future obligations, they can be easily manipulative to show the better financial condition of the entity. 6. Inventory Manipulation The process of amplifying the value of inventory will lead to artificial higher income and shows the best financial position of organisation.

2. Speaking notes: (Sarmila Maskey) Why creative accounting gets more attention from practitioner and investors? Creative accounting is the manipulation of company's accounting figures by using creative knowledge of accounting to reflect good performance and position of the company without violating any accounting rules and laws. Creative accounting is important to both practitioner and investor. In context of practitioner it helps the company to meet the targets of the company like sale figure, sales price from which it meets the expectation of stakeholders, suppliers and customer. And if the company can show more profit from the help of creative accounting then it easily attracts to the investor to buy shares and invest in the company. Market expectation is the theory of efficient markets that always causes existing market price to reflect all relevant information. According to Healey and Wahlen creative accounting help in bridging a performance gap between actual projections of the future known to managers and expectations of the market is often facilitated by managers of the company. According Sruvamanyam by the help of creative accounting managers can get the direct monetary benefit such as bonuses and remunerations. There is no guarantee that every year the company has a profit. The company may also go into losses from which the company has a threat of losing reputation and investors. To reduce this threat a company, adopt creative accounting to hide the bad year of the company.

Creative accounting helps to show profit of the company by hiding loss in the year. And it results the attractions of investors to invest in the company. If the company is unable to overcome through bankruptcy, then creative accounting helps to buy time or extent time needs to settle down the debts of the company. Within the extension the company or practitioner may raise the internal fund for the repayment of debt. The main purpose of creative accounting is income smoothing which attracts practitioner and investor. Practitioner can create stability of share price and reduce level of borrowings and raise capital through investor. And this helps managers of the company to get monetary benefits such as bonuses from the company for achieving profit. Creative accounting gets more attention from practitioner and investor for income smoothing. Income smoothing is the act of using accounting methods to level out fluctuations in net income from different reporting periods. The process of income smoothing involves moving revenues and expenses from one accounting period to another. Creative accounting helps practitioner and investor in the stability of share price and boost up the share price. It reduces the level of borrowing from banks by raising capital internally.

3. Speaking Notes (Raj Pokhrel) Hello everyone, my name is Raj Pokhrel. I am one of the members of group 45. I am here to speak on the real-world example of creative accounting. As we know creative accounting capitalizes on loopholes in the accounting standards. It falsely portrays the image of the company. Creative accounting is a creative and imaginative way to present accounts. This way may deviate from the accounting rules and regulations but are not illegal. We can say that creative accounting is an inventive way of portraying the strong financial position of the business to the investors, creditors and financial institution. There are many real-world examples of creative accounting, but I have chosen 2 of the most famous, firstly WorldCom and second one Enron. Firstly, speaking about WorldCom 

It is a telecommunication company which provides phone services

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Basically, the rented the towers and charge the customers for the service provided.

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In the year 1994-99. The business was doing very good. Revenue and profit were souring.

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But things took a turn in the year 1999. Business declined due to competition

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To hide the loss, they manipulated the net income and cashflow by recording expenses as profit

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By capitalizing expenses, they exaggerated profits by $3billion in 2001, instead of loss

Furthermore, the manipulation of date by the WorldCom can be summarized as, 

They accounted 3.1 billion in capital expenditure, which should be recorded as operating expenses as per the accounting rules.

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Similarly, the planned to amortize 3.1 billion over a period of time. Infact 3.1 billion should be counted as the cost of the business.

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Finally, they showed the net income of 1.38 billion. But in real case there was a massive loss.

Now considering Enron 

Enron was American company regarding commodities and services

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It was founded in 1985 by Kenneth Lay

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It was a merger between Houston natural gas and InterNorth company

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It was one of the pioneer company in the field of natural gas and communication

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The company was making good profits and revenues

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But during 2001, after series of revelations involving regular accounting procedure disclosed frauds, and Enron suffered bankruptcy

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In the year 2001, there was found numerous misconducts in the accounting practices, which ultimately dragged the company towards fiasco.

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The frauds and misconducts done were

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Chief Financial Officer did self-dealing of 30millions

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A total of 700 million net earnings was vanished

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Similarly, 4 billion of liabilities were not disclosed.

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Assets and profits were inflated

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Debt and losses were put into entities that were not in company’s financial statements

These are the 2 renowned real-world examples of creative accounting who suffered bankruptcy.

4. Speaking Notes (Geeta Timilsina) As discussed earlier, creative accounting is the of manipulation of accounting figures and transactions to gain come exclusive gain for the company. It helps to hide the bad year and losses of the company to attract stakeholders and showed them that company is still running effectively. So, the question raised here is, should we really need to encourage creative accounting practices within the company? Manipulating accounting transactions can push company into scandals as we see earlier in the examples that those companies were doing fraudulent activities. Creative accounting is neither illegal nor a Legal, but it is more like a weapon which can cause more harm than good if it is mishandled. As Conner said, it is the intentional misuse of Accounting practices which can negatively affects the value of the company. More value of the company means less unethical behaviour within the company. For the conclusion, although it plays positive role for short term, it results in stock price falls, bankruptcy and can lead the company into scandals in the long run. We can reduce the unethical use of creative accounting by establishing good accounting framework within the company. So, more effective accounting standards should be creating and adapt accordingly.

References: Amat, 0. and Blake, J. (1996) Contabdidad Creativa, Barcelona: Gestión 2000. Liberto, D 2019,`Creative accounting`, Investopedia 2 May, viewed 23 August 2020 https://www.investopedia.com/terms/c/creative-accounting.asp Vyas, AH, Ambadkar, R & Bhargava, J 2015,` True and Fair view- A fact or illusion in the world of creative accounting`, International journal of Multidisciplinary and Current Research, viewed 23 August 2020. https://pdfs.semanticscholar.org/8577/6391a0e8e1fb15ed0de6348d65cf33986162.pdf Remenaric, B 2019,` Creative accounting- Motive, techniques and possibilities of prevention,` Zagreb School of Economics and management, viewed 23 August 2020. https://www.researchgate.net/publication/330202220_Creative_accounting__Motives_techniques_and_possibilities_of_prevention Yadav, B, Kumar, A & Bhatia B,S 2014,`Concept of Creative Accounting and it`s different roles`, International Journal of Management & Social Sciences research (UMSSUR), vol 3. No. 2, viewed 23 August 2020. http://citeseerx.ist.psu.edu/viewdoc/download? doi=10.1.1.428.5424&rep=rep1&type=pdf...