Creative Accounting

DEFINITION, USE, METHODS, SATYAM SCAM AS EXAMPLE, IMPACT ON INDIAN IT ECONOMY. CHANGES, SUGGESTIONS.

1. Creative Accounting

2. introduction A term used to describe the practice of applying inappropriate accounting policies or entering into complex or ‘‘special purpose” transactions with the objective of making a company’s financial statements appear to disclose a more favourable position, particularly in relation to the calculation of certain ‘key’ ratios Mislead users of financial statements

3. Following the law (regulations),the standards (IASs , IFRSs) and the recommended practice , and even with the results audited by external companies, the scope for creative accounting remains large

4. Using the flexibility with in accounting to manage the measurement and presentation of the accounts so that they serve the interest of preparers. Also known as aggressive accounting ,its the operation on financial numbers , usually within the orbit of the law and accounting standards but not providing a ‘‘true and fair” value. Transformation of financial accounting figures from what they actually are to what preparers desire by taking advantage of existing rules and/or ignoring some or all of them( kamal Naser ) definition

5. Why use creative accounting? The shareholder and market reaction depends more and more on managers actions and directors are increasingly judged on profit and growth. So company present a report to investors to see and at times like this, needs creative accounting.

6. Creative accounting used to: Hide a particularly bad year for the company Force an exceptionally good year Continue the pressure to always be the best Smooth out results to give an impression of stability or sustained improvement Boost assets to avoid take-over Survive from bankruptcy Profit more Pay less tax To attract investor To increase (fake) transaction Boost the share price

7. Creative accounting methods Allow company to choose between different accounting methods such as writing of development costs or amortising it Certain entries in the account involve unavoidable degree of estimation , judgment and prediction Artificial transactions can be used to manipulate balance sheet and move profit s between accounting periods Genuine transactions can be timed to give desired impression in the accounts

8. Creative accounting practices Movement of sales Movement of interdivisional sales i.e. From subsidiary to parent or parent to subsidiary companies causing depiction of higher growth of sales Income recognition By adjusting the profits from one year to another year to another year leading to impression management of the financial performance of the company. Corporate takeover Leads to the adjustments in the assets , liabilities and capital of the organization ,thus leading to the effective financial position. Off-balance sheet financing Leasing, higher purchases , share buyback , Special Purpose vehicles are tools used to arrange finance

9. Overstatements of assets Can be done various assets such as inventory , cash .,plant & equipment , investments & Other current assets. Some Other Accounting Practices: Follow-up of matching concept Adjustment in the capital employed Movement in inventory Manipulating the value of goodwill and intangibles

10. Conclusion Creative accounting should be used if it is with the ramification of the law and achieves the company’s ultimate goal of increasing stock value. Must benefit company in the short run and long run. Not to mislead users of F/S

11. Questions ?

12. Thank you ! Presented by Pavan kumar Roll no:67216019