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Creative accounting

Creative accounting refers to accounting practices that deviate from standard accounting practices. They are characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities. This results in financial reports that are not at all dull, but have all the complication of a novel by James Joyce, hence the appellation "creative." Sometimes the words "innovative" or "aggressive" are used.

In some cases, the term is used in professional humor, as when accountants poke fun at each other's more esoteric accountancy practices. In this usage the use of the term "creative accounting" has quite complex connotations: a good laugh, trying to encourage more honest practices, and sometimes despair at ever cleaning up the mess.

The term is used more seriously and disparagingly to refer to systematic misrepresentation of the true income and assets of business organizations. "Creative accounting" on this scale has led to a number of recent accounting scandals, and many proposals for accounting reform - usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added.

Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of accounting irregularities at the Enron, Worldcom, and other business entities in the United States.

One commonly accepted incentive for the systemic over-reporting of corporate income which came to light in 2002 was the granting of stock options as part of executive compensation packages. Since stock prices reflect earning reports, stock options could be most profitably exercised when income is exaggerated, and the stock can be sold at an inflated profit.

The most notable activist is Abraham Briloff (emeritus from CUNY-Baruch) who for years wrote a column for Barrons that constantly analyzed breaches of ethics and audit professionalism among CPA firms. His most famous book is called Unaccountable Accounting.

The profession, in turn, was not kind to Dr. Briloff. See "The AICPA's Prosecution of Dr. Abraham Briloff: Some Observations," by Dwight M. Owsen --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm Briloff was trying to save the profession from what it is now going through in the wake of the Enron scandal.

Further Reading

  • How Companies Lie: Why Enron Is Just the Tip of the Iceberg, A. Larry Elliott, Larry Elliott, Richard Joseph Schroth, Random House, 2002, Hardback, ISBN 0609610813

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