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Creative Accounting

 

1. INTRODUCTION

The paper concerns with the contemporary approaches associated with creative accounting emphasized in the recent financial and accounting literature. In this section, the key aim of the paper is introduced with its components and justification for their selection.

1.1 Statement of Topic

The key aim of this paper is“to assess creative accounting as an indicator of presence of accounting standards and regulatory loopholes. A need to review financial standards”
 

 

1.2 Importance of Topic

The significance of the present literature review can be traced through its focus on the need to reassess the current creative accounting practice and regulatory loopholes. The findings of the research are expected to present set of recommendations for the global regulators to overcome the indentified loopholes. It would also help in identifying the recent approaches used by the business companies for manipulating their accounting figures. The research also reviews the strategies that could be used for tracking creative accounting practices. The review of findings of past studies would present an extensive discussion on the relationship between the modern creative accounting practices and the global accounting standards and rule. Critical appraisal will further highlight the research gaps needed to be looked into in order to provide a systematic framework for policy makers to tackle with these modern tactics of indirectly overriding the rules.

1.3 Brief Overview of Topic Including Key Definitions

It is very crucial and challenging for the global financial regulators that despite of greater control, fines and intense regulatory environment of transparency, how the business corporations are able to manipulate or misrepresent their financial statements using the letter of the rule, not focusing on the spirit of rule or standard (Fišerová, 2005; Jeacle& Carter, 2012; Jones, 2011; Keupp, 2007). In modern international economy, the rate of creative accounting practices has been raising faster by the business corporation, irrespective of their business scale i.e. short-term or long-term business scale (Balaciu, Bogdan,& Vladu, 2009). In the most recent research article, Rajput, (2014) has highlighted a very important statement that creative accounting is the consequence of accounting system loopholes that is being used by the financial managers of the corporations in taking undue advantage. The author did not assessed those regulatory loopholes in detail in context of creative accounting because the main aim behind this study was to discuss some aspects of creative accounting such as ethics, transparency with accomplishment of personal goals. The present study, by agreeing with the statement, is motivated from Rajput, (2014) research and attempts to review the current incidences of creative accounting resulting from specific accounting system ambiguities and escapes. 

The key terms in the review are defined below:

 

Creative Accounting

Creative accounting is defined as the process of manipulating or misrepresenting accounting figures, which optimally improve the company’s financial position, with this process complying with the letter but not the spirit of the law and the standards (Keupp, 2002, p. 1). Hire best assignment writing.

GAAP

The Generally Accepted Accounting Principles (GAAP) are the conventions, rules and procedures necessary to define accepted accounting practice at a particular point of time (Mukherjee& Hanif, 2003, p. 1.8). 

IFRS

The International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for profit organization called the International Accounting Standards Board (IASB) (Guimard, 2013, p. 80). 

Aggressive Accounting

When the boundaries of reason are exceeded in applying accounting principles, companies are said to be engaging in aggressive accounting practices. It is another term used to define creative accounting (Kinney& Raiborn, 2008, p. 6).

Cooking the Books Massaging and Window Dressing

These are the other terms used for creative accounting practices.

1.4 Justification of Themes Chosen

The review is based on three different themes. First would attempt to identify the recent incidences of creative accounting practices all across the globe. The findings under this theme would turn out as a base for the second theme. The identification and understanding of contemporary practices will help in knowing how prudent financial and business managers have become, what tactics they apply in manipulating and misrepresenting their financial information without categorizing these as fraudulent activities. Second theme covers the regulatory loopholes associated with these creative accounting practices. The review of studies under this theme will assist in understanding the existing accounting systems guided by GAAP and IFRS and escapes these rules offer to the financial companies. The third theme would direct the available regulatory strategies to deal with the contemporary creative accounting practices.
1.5 Methodology of Review

A qualitative approach would be used to design the review in the subsequent chapters. The qualitative insights and findings are expected to explore the relationship between the ambiguities and loopholes in the current accounting regulatory framework and the creative accounting practices. By using, the specific keywords (described more in detail within the methodology section below), relevant peer-reviews and monograph studies would be selected from authentic databases like Ebscohost, Emerald, Sage, Science Direct and others. These articles would be chosen based on inclusion and exclusion criteria and reviewed using the article analysis template.   

1.6 Structure of Review

The entire review is divided into 5 sections including this introductory section. In the next part of the research, comprehensive methodology chosen and used for article and research papers’ selection and their analysis is given along with its justification. Later, main body of the review is presented, which is divided into three key themes as justified and explained in the former sub-section. After the critical evaluation of chosen research findings in the main body of the review, the implication of these findings for the practice is offered. Lastly, overall conclusions of the study are incorporated within this literature review research.    

Thus, after gaining an in-depth understanding about the research rationale, its significance and key themes, next section presents the methodological framework of the review (to be continued). 

2. METHODOLOGY

The section presents methodological framework of the study. The significance of methodology for the present research can be examined from its ability to solve out the research problem in a systematic way. Therefore, methodology was chosen after considering the compatibility and consistency of research components with the key aim and research objectives as well as with each other (Panneerselvam, 2004). The framework of methods selected is divided into sub-parts including research design, research approach, research strategy, article selection process, data collection, data analysis and research ethics. 

2.1 Research Design

Research design is a key part of every study that clarifies the main purpose behind undertaking the study. The design helps in further selecting the appropriate approach and strategy. Among three types of research designs, i.e. exploratory research design, explanatory research design, and descriptive research design, explanatory research design is chosen for the purpose of present study (Bhattacharyya, 2009). Reason behind opting for this design was the need to analyse the relationship between creative accounting practices and the accounting regulatory loopholes (Grafton et al., 2011). Only explanatory research design was identified as effective in tracing the causal relationships between the two research variables. On the other hand, exploratory research design was not selected because such type of research design is effective when there is a new phenomenon or subject matter under discussion. Creative accounting is not a new topic and is highly debated in contemporary researches; however, there is lack of discussion on the link between creative accounting and accounting loopholes. Likewise, in choosing descriptive research design, only the detail discussion of the existing findings would be carried out, while the present study attempted to assess and critically analyse the creative accounting as an indicator of presence of accounting standards and regulatory loopholes (Bogt& Helden, 2012).

2.2 Research Approach

From the list of four mainly used research approaches i.e. qualitative, quantitative, mixed and participatory research approaches, qualitative research approach was chosen for the present study. Chosen approach was considered feasible because it helped in gaining the detailed insights and perceptions of authors in different studies about the chosen topic. It should be noted that the investigation was focused on the qualitative facts and not numbers and statistics, therefore quantitative study was not found feasible (Singh, 2010). The concentration was placed upon the human behaviours involved in creative accounting practices and the types of practices designed and implemented until now. Qualitative study also helped in understanding the consequences of different accounting loopholes on the different kind of resulting creative accounting practices. Similarly, mixed approach was also not chosen because no cross validation or checking was required for qualitative study by using it along with quantitative findings. The fourth research approach i.e. participatory research approach was also not helpful for the present study because of its suitability for the researches in which researcher himself is one of the research participants working for the accomplishment of some political or social agenda (Khan, 2011).    

2.3 Research Strategy

Similarly, considering the compatibility with explanatory research design and qualitative approach, literature review was identified as research strategy. A literature review strategy was focused on the use of systematic and explicit methods for identification, interpretation and evaluation of the existing findings on creative accounting practices and accounting regulatory loopholes. These findings were further used highlight the need for the review of current standards and regulations. Since it was found that there is lack of research on the assessment of relationship between the chosen research variables therefore, in order to fill the gap and for development of new insights about the regulatory framework both in GAAP and IFRS standards, extensive literature review was carried out (Kuada, 2012).        

2.4 Data Collection and Article Selection Process

Article selection process is the key component of the literature review strategy in order to how the different past studies were investigated and selected for the purpose of present study. The article selection process was based on keywords strategy. The keywords used in collection process included creative accounting practices, creative accounting practices + regulatory loopholes, creative accounting practices + loopholes in GAAP standards, creative accounting practices + loopholes in IFRS standards. By using these keywords, a detailed search was carried out. The summary of the search is given below:

 

Step and Activities

Emerald

Ebscohost

Sage

Google Books

Others

Total

Keywords-based research

50

25

14

26

5

120

Sorted and selected articles satisfying inclusion and exclusion criteria

15

10

10

20

2

57

Selection of most relevant articles

6

3

5

10

1

25

2.5 Inclusion and Exclusion Criteria

Inclusion Criteria

Exclusion Criteria

Studies in English

Non-English studies 

Journal articles or articles published in Google books

Periodical, websites publications or informal reports 

Peer-reviewed or monograph studies

Non-reviewed or studies with more than one author 

Published between 1995-2015

Not published in the set duration

 

2.6 Data Analysis

Data was analysed in three key themes. These themes included (a) assessment of different types of creative accounting practices, (b) Relationship between different accounting practices and accounting loopholes (both in GAAP and within IFRS) and (c) Identification of accounting standards and framework aspects that need to be revamped. Additionally with the critical analysis of studies in each of the three themes, the list of only key articles is also incorporated for the understanding of the audience of studies. The findings of the analysis were then discussed critically in context of its practical implications (Kumar, 2008).  

2.7 Ethical Considerations 

Numerous ethical considerations were taken into account in order to increase the credibility of present study. It can be analysed that due to absence of any primary research or contribution of primary research participants, there was no need to consider the confidentiality and privacy of the personal information of the research participants. On the other hand, in carrying out literature review, complete compliance of referencing and in-text citations rules were followed and complete credit was given to the original authors of the studies chosen. It can also be depicted that each of the research article was chosen after measuring its reliability and validity. It was assured that all the chosen studies are up to data and meeting the purpose for which they are used (focusing on the relevant details) (Kothari, 2004).

Thus, the chosen methodological framework was used to gather and analyse findings in the next section i.e. main body of the text.    

3. MAIN BODY

3.1 THEME 1: CREATIVE ACCOUNTING PRACTICES

3.1.1 Introduction and Importance of Theme

The first theme is set in order to analyse the different types of creative accounting practices that can be experienced within the contemporary accounting environment in general at international level. The findings are considered as helpful in understanding how accounting managers and other organisational authorities play number game smartly in order to alter their financial reports creatively using accounting principles flexibility without accounting these practices as fraud. The theme was helpful in examining the link between theories and real-world examples from western, European and other counterparts all around the globe (Baralexis, 2004; Smith, 1998).   

3.1.2 Structure of Sub-Themes

The theme is further divided into sub-parts based on different types of creative accounting practices identified including earnings management, income smoothing, fraudulent financial reporting, 

 

3.1.3 Discussion on Types of Creative Accounting Practices

In one of the significant research article, Yadav, (2013) also carried out the comprehensive literature review on the creative accounting. The article was aimed to represent the results of creative accounting on the company’s performance, which uses these. In the article, three types of creative accounting practices were identified i.e. earnings management, income smoothing, and fraudulent financial reporting. The author highlighted it that all the creative accounting techniques are designed within the framework of law. Findings reveal that all of the techniques are based on specific motivators that encourage the financial managements of the corporations to undertake the study. Influence of market perception is also one such indicator that direct the managements to show smooth and steady working of the income rather than fluctuations occurring in real. However, it is worth noting that the findings were quite general with simple descriptions. This gap was filled by examining studies with different methodologies.   

3.1.3.1 Earnings Management

Within the study of Yadav, (2013, p.182), earning management was defined as“the active manipulation of earnings toward a predetermined target, which may be set by management, a forecast made by analysts, or an amount that is consistent with a smoother, more sustainable earnings stream”. The reason behind such practices can further be confirmed from another research study. In the peer-reviewed article, Iatridis& Kadorinis, (2009) have focused on the investigation of motives for and characteristics of UK firms that engage in earnings management activities. The study was based on the regional practices of United Kingdom or Great Britain. It was found that most of the firms, which face issues of low profitability and high leverage measures, are likely to use earnings management to alter their earning creatively by staying within the framework of law. Authors also reported that those studies, which does not voluntarily make accounting disclosures seems to be more inclined towards earning management practices. Iatridis, (2011) latre on in another study also confirmed the similar fact i.e. relationship between low quality disclosures within the financial statements and the earning management practices.

Akers et al., (2007) additionally considered USA context in order to investigate upon the earnings management and its implications on the financial positions of the corporations. It was stressed by the authors that earning management could be in term of changes made by the management in accounting methods, in realising one-time nonrecurring items, in rescheduling or accelerating expenses and revenue items or by using other methods for influencing short-term earnings. The USA corporations have used earning management that ultimately affect their earning quality.  
 

 

3.1.3.2 Income Smoothing

Another types of creative accounting practices identified within the contemporary accounting and management environment is related with income smoothing. Yadav, (2013; p. 182) has defined“A form of earnings management designed to remove peaks and valleys from a normal earnings series, including steps to reduce and“store” profits during good years for use during slower years”. According to Bitner& Dolan, (1996), there is a strong relationship between the smooth income and equity market valuation. The income smoothing technique is used creatively for increasing the value of firm among the international spectators. Martinez& Castro, (2011) have also confirmed the income smoothing technique usage within the Brazilian companies. The findings revealed that Brazilian companies modify their income to receive better rating in their public bond issues. By showing low income during peak years, further act as information-signalling behaviours.    

On the other hand, the trend of income smoothing practices within USA can be traced through the practical examples of companies focused within the study reported by The CPA Journal, (1999). In this research, income smoothing in public companies was discussed. The author used the term,“cookie jar” for specifying that income be altered to remove peaks by the companies. Such companies have used reserves for bolstering earnings reports and for hiding the true picture of deteriorating profitability (The CPA Journal, 1999). Atik, (2009) in his study has detected and discussed the case of Turkish firms using Moses’ smoothing behaviour index. It was found that almost 60% of the companies are involved in the income smoothing behaviours by changing their total debt to total assets ratio and prechange earnings deviation.  

3.1.3.3 Fraudulent Financial Reporting

Yadav, (2013) has also emphasised upon the use of fraudulent financial reporting as a key technique of creative accounting practices. Author define it as“intentional misstatements or omissions of amounts or disclosures in financial statements, done to deceive financial statement users, that are determined to be fraudulent by an administrative, civil, or criminal proceeding”. It can be analysed that difference between the above two and this type of practice is the presence of fraudulent perception in the minds of the accounting managers. According to Popescu& Ashrafzadeh, (2013), this type of activities is intended to deceive and look for the solutions from the accounting framework under the financial pressure. Authors highlighted that practically companies hide the truth or true and fair view of their financial position or lie in the similar respect. These activities results in the weak internal control and governance structures of the corporations.  

Tak, (2011), highlighted the practical examples of the Enron and WorldCom cases in his research article. It can be depicted that how the management hide the disclosure of good financial information and the false information affected the decisions of the investors causing them to suffer heavy losses. It was concluded that through manipulation the rational decision-making is prevented. The study further confirms the different types of accounting practices used by the modern companies in creative accounting including earning management, income smoothing, aggressive accounting, big bath accounting, accounting errors and irregularities (Tak, 2011). Boyle et al., (2012) in their study further confirmed the high rate of fraudulent financial reporting practices within the United States companies. According to the findings of this study, the contribution played by chief executive officers (CEO) and chief financial officers (CFO) is vital in encouraging and preventing such financial frauds. 
 

 

3.1.4 List of Key Articles in the Theme

S.No

Authors and Data

Creative Accounting Practices Discussed

1

(Yadav, 2013)

Earnings management, income smoothing, and fraudulent financial reporting

2

(Iatridis& Kadorinis, 2009)

Earning management and its relationship with profitability and leverage

3

(Iatridis, 2011)

Relationship between low quality disclosures and earning management practices in UK

4

(Akers et al., 2007)

Earning management in USA such as accounting methods change, increased revenue or expense, methods for influencing short term earnings

5

(Bitner& Dolan, 1996)

Relationship between the smooth income and equity market valuation

6

(Martinez& Castro, 2011)

Income smoothing in Brazilian companies is used for improving bond ratings and for signalling information

7

(The CPA Journal, 1999)

Income smoothing or cookie jar practices in USA

8

(Atik, 2009)

Income smoothing in Turkish firms to change their total debt to total assets ratio and prechange earnings deviation

9

(Popescu& Ashrafzadeh, 2013)

Fraudulent activities in hiding true profitability of firms

10

(Tak, 2011)

Practical examples of fraudulent creative accounting practices in Enron and WorldCom

11

(Boyle et al., 2012)

Role played by CEO and CFO in promoting financial fraud taking advantage of loopholes

 
3.2 THEME 2: RELATIONSHIP BETWEEN DIFFERENT ACCOUNTING PRACTICES AND ACCOUNTING LOOPHOLES (BOTH IN GAAP AND WITHIN IFRS)
 

 

3.2.1 Introduction and Importance of Theme

After examining different types of accounting practices, it is worth noting to examine that these accounting practices are the result of loopholes in accounting practices and standards. The analysis of different principles and standards in GAAP and IFRS can further help in understanding which loopholes and lacking are actually leading the path towards creative accounting practices. The findings of the theme include examination of some key standards as well as practical examples (Divya, 2014; Shah, 1997).

3.2.2 Structure of Sub-Themes

The discussion under this theme is categorised into two key parts i.e. loopholes in accounting principles and (ii) loopholes in accounting standards (GAAP and IFRS). 

3.2.3 Discussion on Relationship

3.2.3.1 Loopholes in Accounting Principles

In a study by Rajput, (2014), case of an Indian corporation was presented and analysed i.e. Satyam Computers as a fraudulent accounting practice. It was clearly described by the author that the loopholes and weaknesses in Indian accounting standards facilitated the corporate sector towards the creative accounting practices. It was highlighted that common manipulations in India in creatively manipulating accounting records include revenue manipulation, expense manipulation, cash manipulation and record of revenue. The cause of such accounting manipulation was the permission given by the policies within international accounting standards in carrying the non-current assets at either revalued amounts or depreciated historical costs. Misapplication of accounting principle like disclosure requirements further motivates them to violate the accounting rules. Popescu& Ashrafzadeh, (2013; p.5) within their research have also emphasised upon one of accounting principle that have led the creative accounting practices. The authors stated that“the change of the value and structure of revenues. In certain situations, the recognition of revenues can be intensified or slowed down by applying the principle of prudence or the principle of connecting costs with revenues”.   

It was also found that the change in the assets’ value could be made by using the flexibility offered is assets’ valuation principle in terms of depreciation. In another research article by Moldovan et al., (2010), authors aimed to carry on with a discussion on the role of creative accounting as a technique of accounts manipulation. The role was later on compared in relation to the fundamental principle of accounting i.e. fair view presentation, and the ethics of the accounting profession. In addition, a literature-review based study reported that there is an inverse casual relationship between the creative accounting practices and fair view principle. It was found that the principle could not be achieved through creative accounting. The fair view principle has explicitly highlighted that it is impossible for the companies to present the absolutely true and fair view of the financial accounts and therefore, managers take advantage of this key aspect of standards in using the creative techniques for presenting the financial position and performance of the company in a better light.  

After examining the basic overview of how different accounting principles have offered flexibility to the accounting users, it can be analysed that regulatory loopholes in specific standards i.e. GAAP or IFRS further clarify the boarder coverage of the issue all across the globe.  
 

 

3.2.3.2 Loopholes in Accounting Standards (GAAP and IFRS)

Besides principles, regulatory standards also play vital role in the creative accounting practices. Lander& Auger, (2008) within their research studies have identified that using the overly rules-based standards; accounting managers are able to manipulate off-balance sheet amounts in different ways. Likewise, in the present study, the authors also highlighted it that contingent obligations and guarantees are critical element for which flexible standards are present. These accounting standards viewed that probabilities and losses are the matter of judgement and choices of the management and therefore no significant threshold has been provided in determining that whether a liability should be recognised and for how much amount in different situations. It can be analysed that securities and exchange commission (SECs) have offered variety of contingent disclosures that result in inconsistency within the measurement process. As consequences, creative accountants find variation as a loophole to modify their liability amount according to their understanding.      

Yadav, (2013) in his study have also confirmed that it is the accounting standards’ parts, which permit the accounting individuals to involve in the creative accounting practices and allow them to use alternative methods of accounting. These include alternative methods given for revenue recognition, depreciation charging, cost recognition, stock valuation, brand accounting and capitalization of interests. One of the clear examples given in Shah et al., (2011) research can be used to justify the above point. Shah et al., (2011) in their research investigated how managers become successful in adopting and employing creative accounting practices. The findings of study highlighted that recognition and recording the revenue in books of accounts is still a debatable question having no specific answer. Therefore, companies use this flexibility for their advantage.

It is a common practice to book revenue even before recognizing it to increase the profits. Sometimes companies do not want to show a profit above a certain level; in that case, companies defer revenue to reduce their profits (Shah et al., 2011, p.533).

The example here clearly indicates the need to review the loopholes in the revenue recognition approaches. The authors also stated that the role of International Accounting Standards and GAAP is vital in encouraging the change of accounting methods as per requirements of the company.

Similarly, like GAAP, IFRS standards have also led the creative accounting acquisition by the companies up to greater extent. According to Amat& Gowthorpe, (2004), IFRS 3 offers extensive guidelines on how the purchase prices of business acquisitions should be allocated. Despite there is a strong check imposed by the SEC still the companies find a room for manipulation in relation to research and development cost. Another significant example is reported in another research by Florin-Constantin, (2012). In the IAS2“inventories” in IFRS, treatment of stock assessment is left on the entity’s management who use it according to the desired results needed.   
 

 

3.2.4 List of Key Articles in the Theme

 

S.No

Authors and Data

Loopholes in Accounting Standards Identified

1

(Rajput, 2014)

Flexibility offered by Indian authorities to Indian corporations in terms of recording non-current assets at either revalued amounts or depreciated historical costs 

2

(Popescu& Ashrafzadeh, 2013)

Revenue recognition

3

(Moldovan et al., 2010)

Flexibility in fair view presentation

4

(Lander& Auger, 2008)

Overly rules based standards help in manipulating off-balance sheet amounts

5

(Yadav, 2013)

Revenue recognition, depreciation charging, cost recognition, stock valuation, brand accounting and capitalization of interests

6

(Shah et al., 2011)

Revenue recognition in GAAP

7

(Amat& Gowthorpe, 2004)

IFRS 3– recognition of purchase price of business acquisitions

8

(Florin-Constantin, 2012)

IAS 2 inventories– treatment of stock assessment flexibility

 

3.3 THEME 3: IDENTIFICATION AND REVIEW OF ACCOUNTING STANDARDS AND FRAMEWORK
 

 

3.3.1 Introduction and Importance of Theme

After generally having a light on the different types of creative accounting practices prevailing in the industry all across the globe and loopholes in principles and standards, it was highly necessary to identify areas needed to be reviewed in order to give a more comprehensive accounting framework. Such framework should consider how creative accounting practices could be controlled by modifying accounting standards and principles.

3.3.2 Structure of Sub-Themes

The theme is divided into review of accounting methods and the review of ethical concerns and governance issues. This is so because the review of literature has not only highlighted upon the need to modify the standards but these also emphasise on analysing specific issues.  
 

3.3.3 Discussion on Need to Review Accounting Standards

3.3.3.1 Review of Accounting Methods

Different authors in wide range of studies have suggested measures to consider by standards setters in order to decrease the chances of creative practices. Wang, (2008) in his investigation has clearly mentioned that the key point associated with the efficacy of accounting standards is the careful definitions and careful explanations of all the accounting items. It was argued by the author that although International Accounting Standards are contributing vitally in forming the appropriate use of accounting standards while the flexibility offered through non-clarified definitions are further worsening the situation. Niskanen&.Keloharju, (2000) further added the suggestions and ways for removing accounting frauds within the organisations by reducing the scope for choice of accounting methods. The author stated it that by specifying the circumstances in which a standard would be needed to apply must be clarified by standards setter. This would ultimately assure consistency in the use of methods. By talking about the need for latest developments in the accounting, it was stated that these must be concerned with the reduction in accounting choice.

Healy&.Wahlen, (1999) have additionally included to the findings by reporting two ways for curbing the abuse of judgements in accounting. It was stated that authorities must draft the rule that minimise the use of judgement while the other is associated with the prescription of consistency. Companies must be checked in the application of consistent accounting policies in the subsequent years irrespective of assessing its suitability in that year. Substance over form is realised as effective concept that could be used to track and deal with the artificial transactions. Furthermore, regular revaluation of items rather yearly estimation can also help in reversing the worsening situations (Omurgonulsen& Omurgonulsen, 2009).     

 

3.3.3.2 Review of ethical concerns and governance issues

On the other hand, Osazevbaru, (2012) discussed the importance of the ethical consideration in keeping a strong check on the working of the accounting managers. The role of auditor was found as vital in the overall process as in the countries where auditors have strong optimistic view of resolving the creative accounting practices and issue, the chances of occurring of such practices automatically lower.

Most of the literature review have emphasised on the need to consider ethical standards and governance codes along with the regulations and accounting standards as regulation without enforcement is useless and is not able to curb the misleading creative accounting practices (Hosho et al., 2013; Rawashdeh, 2012).

Another study by Odia& Ogiedu, (2013) has also included a discussion on the visible relationship between creative accounting practices and the ethical considerations. These included“the personal integrity, morality, sense of judgment, belief, training and discipline of the account preparers play a significant role”. It was highlighted that corporate financial reporting authorities must look into the matter in deep in order save the accounting profession. Acts and reforms for governance and ethics need to be taken into account for effective outcomes. Talib, (2003) further raised a question connected with these findings by stating that whether or not the development of audit committee is sufficient for assuring governance. The answer given was in disagreement, as these committees in real life have not helped in decreasing the incidences of earning management within the business corporations. This is so because managers also boost their creative accounting practices by developing strong associations with the clients. Therefore, strict check and balance on independent audit committees’ efforts is also important.     
 

 

3.3.4 List of Key Articles in the Theme

S.No

Authors and Data

Need for Review

1

(Wang, 2008)

Careful definitions and careful explanations of terms in IAAS

2

(Niskanen&.Keloharju, 2000)

Reducing scope of choice and encouraging consistency in using accounting policies

3

(Healy&.Wahlen, 1999)

Minimise the use of judgement and use of substance over form

4

(Omurgonulsen& Omurgonulsen, 2009)

Regular revaluation of items

5

(Osazevbaru, 2012)

Check on accounting managers

6

(Hosho et al., 2013; Rawashdeh, 2012)

Accounting operations governance code

7

(Odia& Ogiedu, 2013)

The personal integrity, morality, sense of judgment, belief, training and discipline of the account preparers

8

(Talib, 2003)

Check and balance on independent audit committees’ efforts

 


Thus, it can be noted that there is strong relationship found among the recent creative accounting practices at international level and the accounting loopholes in principles as well as standards. The review of global practices highlighted that at present business organizations are using smart tactics to deal with the hurdles and constraints placed upon them by the accounting practices. Based on the findings found in the past studies for need to change the present accounting regularity framework, the set of implication for modern corporations can be produced. These implications are discussed in detail in the subsequent section of the study.   

4. IMPLICATIONS FOR PRACTICE

The section presents a list of the implications for the analysis for managerial and policy practices along with brief justification. It can be analyzed that past literature have focused on the regional differences in suggesting the managerial practices and need for review. The implications given in this section highlight on the implications that could be generalized.  

4.1 Implications on Corporations and Companies Act

The findings of the present study suggested that there is a stronger need to modify the Companies Act in UK and USA. The reason behind such modification is that other than accounting standards and regulations, the Companies Act encourages the users to use flexibility for their benefits. It can be examined that some of the accruals interest technical releases from the accounting standards bodies is not up to the exact specification within the Companies Act 1985. When comes the point of giving significance to GAAP or IFRS and Companies Act, corporations confront with the problem. Yadav, (2013) in his study has also emphasized on the need to review the current Companies Act.

These changes would further strengthen the relationship between the government authorities drafting and amending Acts and accounting boards controlling the formation and administration of the standards. The visible relationship will help corporations in consistently applying the relevant principles and standards successfully without any loopholes or flexibility. The findings of the present literature review will also help the corporations to identify the consequences of fraudulent accounting practices that are labelled as“creative accounting within the framework of law” by them.

4.2 Implications for Policy Makers or Standards Setters      

The range of countermeasures identified in the past studies for dealing with the creative accounting practices can have true practical implications for the standards’ at international level. It can be analyzed that policy makers are required to deal with the different aspects of standards like accounting principles, practices, governance and ethical considerations in order to achieve the desired level of outcomes. The present research directs them to review all the definitions and careful and specific explanations of all the key terms in IAAS. The clear definitions will automatically reduce the scope of choices for the users and will ensure consistency. It is the time now policy makers and standards’ setters must realize the need to control judgment and flexibility without sacrificing the innovation. Too much overly rule-based approach can also ruin the entire structure of accounting policies and practices for the business organizations. Likewise, too much flexibility and choice also need to be verified and tested at regular intervals in order to control the creative accounting practices and the resulting corporate scandals.

The present study clarifies the larger role of loopholes associated with principles and standards as compared to the fraud and smartness of the creative accountants. Therefore, accounting bodies must work in context of standards formed to explain procedures for revenue recognition, depreciation charging, cost recognition, stock valuation, brand accounting and capitalization of interests.

4.3 Implications for Auditors

The findings also have strong implications on the auditors because many of the research studies have heavily concentrated upon the auditor’s active role in the creative accounting practices. Their cooperation with the management additionally influence the creativity in using the flexibility or entrenchment within the standards for the sake of their advantages. It has been identified that UK and USA and other countries have emphasised on the development of an independent auditor committee in order to look after the corporate governance maters however, despite the presence of this committee, corporations are tactfully employing creative practices to modify their accounts. Therefore, the policy makers and authorities must analyse that regular assessment of the committee’s efforts is also a vital attempt to control fraudulent activities.     

5. CONCLUSIONS

In this section, the overall findings of the literature review are incorporated along with the key strengths and weaknesses. The overview of the major gaps found in the previous literature and the areas for further research are highlighted. 

5.1 Summary of Themes and Methods

In order to achieve the key aim of the study i.e. to assess creative accounting as an indicator of presence of accounting standards and regulatory loopholes, a comprehensive literature review has been carried out categorised into three key themes. The first theme was set to analyse the different types of creative accounting practices used by the contemporary corporations at international level. The past studies highlighted upon the range of contemporary practices including earnings management, income smoothing, and fraudulent financial reporting. These three practices are the mostly used practices. The studies emphasised on UK, USA, Turkish, Brazilian and other countries in discussing different creative accounting practices used. The studies attempted to highlight the relationships among the creative accounting practices and the quality of financial reporting in terms of disclosure, treatment and valuation of firm’s value in the market. It was also found that the practices are also used for signalling information in the market and consequently increasing the brand value in front of the international investors.  

In another theme, relationship between different accounting practices and accounting loopholes was identified using the examples from GAAP and IFRS standards. It was found that the present international accounting standards are flexible and based on judgements. This judgment is associated with variety of accounting principles and standards like revenue recognition, depreciation charging, cost recognition, stock valuation, brand accounting, business acquisitions’ pricing, inventory and stock assessments, and capitalization of interests. The results of the theme concluded that in both types of situations i.e. with overly rules-based standards and policies and with flexible standards and policies, outcomes are likely to be worsening. The need is to keep balance between the two extremes by modifying certain areas in the present accounting standards.

The analysis of the third theme concluded that the review of accounting standards at international level has turned out as the biggest necessity of the present time. There is strict need to review all the important accounting items’ definitions and to provide careful explanations for the terms. It can be concluded that by reducing scope of choice and encouraging consistency, the incidences of fraudulent activities can be controlled. It cannot be undermined that rules are broken when the opportunities are provided. Therefore, the roles of international accounting bodies, auditors, Companies Act’s regulator, and the stakeholders are vital in reviewing and altering the standards to overcome the loopholes within the present system.         

5.2 Key Strengths and Weaknesses of the Literature

Based on the findings and practical implications of the present literature review, it can be identified that it has successfully offered a review of past 20 years-based studies. The broader coverage of research studies on the subject matter has offered an opportunity to the audience in recognising the changes occurred within the trends of creative accounting practices at present as compared to past years. The analyses have shown that the tactics are same and mostly encountered accounting practices have not changed. However, the names of the practices have been changed like cookie jar, massaging records, aggressive accounting, earning managements and others. The literature helped in understanding that by giving sophisticated names to the contemporary creative accounting practices, regulators cannot release themselves from the responsibilities. Multi-dimensional review approaches identified and discussed in the present literature further increases the strength of the present study.       

On the other hand, weakness of the present study is related with its limited focus on studies due to word count restrictions under each theme. The restriction might have resulted in rapid review of findings. Some of the key points are likely to be overlooked. However, sufficient considerations were placed on relevant points up to greater extent.

5.3 Gaps in the Literature and Areas for Further Research

It can be analysed that due to the generalised nature of the present literature review, only qualitative findings were included in the present literature review. Therefore, in order to correlate and substantiate these findings, a mixed study would be suggested for further research. Examples from the international corporations’ financial reports can be assessed to show how different types of creative accounting practices are employed in altering the different accounting heads i.e. cost, revenue, profit, interest, expenses and others. Thus, cross-analysis can be carried out by linking with specific definitions and principles in GAAP and IAS standards to show how the wordings and specific contents or explanations can be changed for achieving the desired outcomes.  
Thus, the study can be concluded with the statement that due to the relationship between contemporary creative accounting practices and regulatory loopholes, the current accounting standards are required to be reviewed and modified as soon as possible otherwise the consequences would be in the form of future financial crisis like the one experienced during the period 2008-2009