Creative Accounting

CREATIVE ACCOUNTING

Definisi:

Creative accounting is a process where by accountants use knowledge of accounting rules to manipulate figures reported in the accounts of a business. In other words, it is the transformation of accounting figures from what they actually are to what preparer’s desires by taking advantage of existing rule and/or ignoring some or all rules. Creative accounting is a practice whereby a company takes advantage of loopholes to show that they are more profitable or financially stable than they actually are. In many cases of creative accounting, the company is not yet breaking the law, but is most likely engaging in unethical behavior.

The reasons of creative accounting:

The reasons for creative accounting could be several. To defend the owners of companies the creativity by it self can sometimes come from the very person who maintains the accounts and this is time to question whether that creativity is deliberate or caused by lack of financial knowledge.

·         To be financially Stronger than it actually is.

·         To increase the companies stock value.

·         In order to ensure the inflow of capital and investment.

·         Income Smoothing

In its essence there arealways "only" two reasons; the overestimation or underestimation of the individual components of financial statements and it corresponds accordingly to what is needed to get. If the company (not the new established company) needs to gain a greater amount of the loan, it is clear that they must have their assets in the desired positive values.

Advantages and disadvantages of creative accounting:

Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company. Creative accounting can be used to manage earnings and to keep debt off the balance sheet. Some creative accounting is simply done in error when an accounting system is not set up for checks and balances. However, Creative accounting has been defined as the exploitation of loopholes in financial regulation in order to gain advantage or present figures in a misleadingly favorable light. In many cases of creative accounting, the company is not yet breaking the law, but is most likely engaging in unethical behavior. Creative accounting can lead to suspicion, audits by the government, and in the case of fraud, the dissolution of a company.

Endron Schandal:

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that – by the use of accounting loopholes, special purpose entities, and poor financial reporting – were able to hide billions of dollars in debt from failed deals and projects.Enron shareholders filed a $40 billion lawsuit after the company's stock price, which achieved a high of US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001.

Enron's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. The combination of these issues later resulted in the bankruptcy of the company. Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison.