While some might categorize accounting as a matter of strict principles, numbers and exactitude, there are people who disagree and argue that there is a creative side to it. The article “Creative Accounting: How to Buff a Company” by Ken Brown elaborates on it.
Summary
Accounting has never been an exact science; yet, auditors often face the situations where their judgment is required. This judgment must be applied to hundreds of transactions, depending on the company. While doing this, they do not reflect the usage of a exact mathematical methodology, no. Their job requires a judgment and opinion from them to analyze endless numbers of transactions by having looked at sample size and not all of them. The previous in an attempt to make the auditing process not so costly while at the same time making the effort to reflect accurately their client’s financial condition.
Brown utilizes Enron Corp. as a recurring example of creative accounting. “Now in the wake of Enron Corp.’s collapse and subsequent revelations of accounting irregularities at other big corporations, it has become increasingly clear that number crunchers often represent a company’s finances in the most flattering way”. And that is how “creative accounting” is explained. All that the so-called creative accounting is attempting to is an alteration of perceptions about a business’ performance.
The article underlines three areas where accounting standards are “loose enough” for companies to make themselves look better: Sale recognition, Asset Valuation, Off-balance-sheet Financing.
When to recognize a revenue is been a historical issue on the accounting world. The issue boils down to accrual method or cash method for the recognition of revenue. The industry also comes into play; if services are provided or if goods are. In other words, at what point do companies record a sale to accurately reflect