Creative accounting is the future… Are you ready for the big leap?
Creative accounting is the future… Are you ready for the big leap?
discover | Tuesday - 29 / 04 / 2025 - 9:02 am
Creative accounting is an accounting style that many might overlook compared to other well-known accounting styles like cloud accounting and cost accounting, which have gained widespread recognition in professional and academic spheres. But what exactly is the concept of creative accounting? Does it really contribute to improving the accuracy and efficiency of preparing financial statements for companies? Follow the next article to discover what creative accounting is, how it is used, and whether it is an effective tool for improving the accuracy and ease of preparing financial statements for companies or if it carries aspects that may affect financial transparency and credibility.
Creative accounting is the future… Are you ready for the big leap?
What exactly is creative accounting?
Creative accounting is an accounting practice that involves deliberately altering a company’s financial statements. Through it, the accountant changes the numbers included in the financial statements to achieve certain personal or corporate interests, which leads to misleading and concealing the true financial position of the company, and this is done through the improper use of generally accepted accounting principles. This change in the financial statements also aims to create a different impression about the company than it actually is, all in order to achieve specific goals, such as attracting new investors and financiers.
But what are the reasons for the emergence of creative accounting? And what is the purpose of its application?
The answer:
There are 4 reasons behind the emergence of creative accounting.
The eighties of the past century witnessed the emergence of creative accounting as a result of several main factors, the most prominent of which are:
The deterioration of the financial conditions of companies:
Many companies faced great difficulties in maintaining the continuity of their businesses and achieving the desired profits, which exposed them to potential bankruptcy risks.
Manipulating financial statements:
Some companies deliberately distorted the numbers in their financial statements and manipulated profit ratios, in an effort to attract new investors and achieve illegitimate material benefits.
Conflict of interest:
The conflict between the internal and external interests of companies led them to change their financial statements, in an attempt to create a balance in these conflicting interests.
Flexibility in applying accounting principles:
Creative accounting allowed companies the freedom to choose between a variety of accounting elements, without obligating them to strictly adhere to the unified accounting principles.
The combination of these factors has led to the spread of the phenomenon of creative accounting, which has been used as a tool to change financial statements in order to achieve specific goals.
Creative Accounting Objectives:
Creative accounting seeks to achieve several main objectives, which are as follows:
1- Tax evasion:
Some companies use creative accounting methods to reduce declared profits and inflate expenses in the records submitted to the tax authorities, which leads to a reduction in the amount of taxes due. These practices are often implemented with the help of external accountants to achieve illegal tax savings.
2- Improving the company’s financial position in order to obtain financing:
Some companies seek to present a stronger financial picture than it actually is, in order to attract investors and obtain external financing. This is done by preparing incorrect financial reports that suggest the company’s ability to achieve high profits, which entices investors to invest their money in the belief that their investments are safe and profitable.
3- Achieving personal benefits:
Some executives may exploit creative accounting to achieve personal gains at the expense of the company and its shareholders. These practices include adjusting financial figures in their favor, whether by increasing bonuses or achieving illegal gains without taking into account the negative effects in the long term.
4- Raising the market value of shares:
Some companies resort to inflating profits in the financial statements to raise the prices of their shares in the financial markets. This contributes to attracting more investors and raising the market value of the company, but it may later lead to a collapse of confidence when the truth of the company’s real financial situation is revealed.
Well, after reviewing the most important reasons that prompt accountants to use this type of accounting, I will share with you one of the positive aspects of creative accounting.
The importance of creative accounting:
The creative accounting that some companies adopt, although it is considered a fraudulent method, it constitutes – from the point of view of some institutions – an important element that can achieve certain benefits represented in the following points:
1- Attracting investors:
Creative accounting helps companies promote their ability to achieve high profits, by preparing financial statements in a manner that is contrary to the truth. As a result, investors are attracted to invest their money in the company, believing that it achieves strong financial performance. However, they often overlook the real financial reality and the challenges that the company may face in the future.
2- Maintaining the stability of the company:
When the company distributes its profits in full to investors, it may face difficulty in securing the necessary financing for its future projects. Therefore, some companies resort to activating creative accounting to reduce declared profits, which helps them retain part of their financial resources, in order to ensure the continuity of their operations and their ability to meet their operational obligations.
3- Improving the company’s image:
In some cases, creative accounting plays an important role in improving the company’s image, as it shows it in a strong financial position, capable of achieving profits and reaching its desired goals. This, in turn, contributes to enhancing the confidence of customers, partners and investors, which gives the company a greater competitive advantage in the market.
Now that we know the importance and objectives of applying creative accounting, we will show the most prominent methods and techniques of creative accounting. Continue reading, as more valuable information awaits you!
Creative accounting methods: Innovative techniques for transforming numbers!
Companies use a variety of methods and approaches that may sometimes include unsound practices such as manipulation and fraud. The most prominent of these methods are the following:
1- Some companies adjust the value of their expenses and change cost accounts in a way that is completely different than it actually is, in order to achieve specific goals.
2- Some companies estimate revenues with inaccurate amounts that do not reflect the actual reality, which leads to misleading the parties concerned.
3- Making significant changes to the receivables included in the financial statements, which affects the accuracy of the financial statements.
4- Sometimes, there is a clear manipulation of the values of income and financing, which reflects an incorrect picture of the company’s financial performance.
5- Manipulating the valuation of the assets owned by the company, such as real estate and other properties, in order to achieve illicit gains.
6- Modifying financial statements to improve its image to investors, giving a false impression of its financial strength.
7- Changing future profit estimates even though they may not reflect the actual reality, in order to improve the company’s image and attract more investments.
8- Reducing profits as a method of evading paying taxes, which negatively affects the general economy.
These practices, although they may achieve short-term gains, may lead to serious legal and financial consequences in the long term.
But is creative accounting legal?
Although creative accounting aims to improve the company’s image by exploiting legal and accounting loopholes, which in turn may lead to a slight deviation from the approved accounting standards, it – creative accounting – is considered legal in most cases.
In practice, we find that those responsible for creative accounting are not subject to legal accountability except in cases where the matter involves clear manipulation that leads to misleading public opinion or exposing investors to significant losses.
In other words: Although exploiting loopholes in accounting regulations leads to presenting a distorted picture of the company’s true financial position, creative accounting remains legal as long as it is in line with changing restrictions and legislation.
What are the methods used to reduce the effects of creative accounting?
The use of accounting manipulation methods has resulted in increasing interest from many competent government agencies seeking to reduce the effects of creative accounting and significantly reduce its use.
Among the most prominent measures taken in this area are strengthening corporate governance and forming specialized audit committees.
In this context, the International Accounting Standards Board has amended some old standards that were considered major factors contributing to manipulations and illegal practices, including creative accounting. These old standards have been replaced by new standards that include:
1- Unity of accounting treatments:
The system that allows the choice between different alternatives for processing accounting operations has been abolished, while maintaining uniform accounting treatments. This amendment aims to prevent the exploitation of alternatives to increase profits or cover up illegal activities that companies may carry out.
2- Integrating accounting standards with interpretations:
Interpretations have been integrated within the standards themselves instead of separating them as was the case in previous standards.
3- Clarifying the practical application of each accounting standard:
This amendment is considered one of the most prominent changes in accounting standards, as companies faced difficulty in applying the standards practically in the past, which led to multiple interpretations of the same standard. This loophole was exploited to manipulate financial reports due to the ambiguity of the standards and their misunderstanding.
4- Using disciplined cloud accounting programs:
Some Enterprise Resource Planning (ERP) systems, such as Logix systems, help control financial manipulation, as they prevent data modification or manipulation of financial statements, which reduces the use of creative accounting.
What innovative solutions does Logix offer you?
Discover the power of innovation with Logix accounting software – the ideal solution that enables you to create financial reports automatically, without the need for complications.
Adding daily entries has become easy and automated, however, if you want to add your own touch, you can create entries manually with ease. The system also guarantees the continuous technical support around the clock and periodic free updates, to always be at your service. Logix is not just an accounting program, but rather an integrated system that facilitates the management of human resources and operational processes smoothly and accurately, all to put in your hands the tool that contributes to enhancing your performance and achieving success in all dimensions of your work.
Finally,
This article reviewed one of the unfamiliar practices in the field of accounting, which is creative accounting, where its nature and main objectives were clarified, in addition to the importance it gains in certain contexts.
Reasons behind the emergence and spread of creative accounting were also analyzed (and with a detailed explanation of the techniques and methods used in its practical application).
Make your accounting more accurate and transparent with Logix Accounting System! Try it now to improve your accounting operations and avoid financial manipulations with ease.
