Accounting is generally referred to as the standard set of rules, procedures and practices that define and provide a framework to the management and presentation of financial statements and records by an entity. Hence, the methodology and the profession is not generally associated with terms like creativity, innovation and inspiration because the prescribed guidelines hardly leave any room for the inclusion of anything new or different. But human brain is a place full of ideas. People always find a loophole to enter a puzzle, in order to distort it. Similarly, even accountants always find or create opportunities for twisting and turning the recording of different items, often done for their own or the company’s benefit. The numerous factors that drive or motivate accountants to adopt these “creative” practices include personal benefits, job security or some benefits, job security or some personal satisfaction.
The most common practice involved in the accounting creativity is the boosting of profits, revenues and the overall balance sheet of the firm. Companies often want to demonstrate a strong financial position in the current, as well as the future scenario and hence end up overvaluing their assets most of the time. The accountants normally show a provision for the doubtful accounts in the balance sheet of the organization, while they also end up manipulating their inventory levels by overstating their values.
The other practice commonly adopted in accounting is the undervaluation of the liabilities. While, the overvaluation of the assets lead to higher income and stronger financial position for the company, the undervaluation also at the same time reduce the debt, hence strengthening the position. Companies can manipulate the pension accounting for changing or earnings and the liabilities. The representation of the contingent liabilities can also be changed for personal benefits, hence leading to numerous discrepancies.
Hence, it is extremely necessary for the investors and third parties to analyze and study the statements properly so that they don’t overlook these discrepancies and changes in the records. If there are methodologies to find loopholes in the accounting standards for altering the rules for individual benefits, there surely have to be ways for determining these inflation or deflation of numbers. The manipulated numbers have shocked and hurt the market several times in the past and will continue to do so in the future in newer and more innovative ways. Thus, its time that investors use their creativity for defeating the creativity already associated with accounting.
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