3 Manipulating reports and creative accounting
Manipulation of financial statements and creative accounting For as long as entities are required to produce accounts for specified periods, there will be the problem of inter-period allocation of transactions and economic activity. In the UK, accounts are required to show a true and fair view. It is ‘a’ not ‘the’ because there is no such thing as the unique set of numbers for that period for that company. What is ‘true and fair’ is in the eye of the beholder. As a result, management will always have the ability to move profit from one period to another depending on their view of corporate transactions. In pejorative terms, this is called ‘income smoothing’. It is all about the judgement allowed within the rules to portray a complex set of transactions and events.To complicate matters further, inadvertent wrong presentation is an error, but deliberate wrong presentation is fraud. Establishing the mens rea to distinguish the latter from the former can be very difficult. Jones1 uses the following definitions and we have added a distinction between creative (borderline acceptable) and aggressive accounting (likely to be sanctioned by the FRC) though this is a spectrum and the lines between these concepts are blurred and may be movable: 1 Fair presentation is using the flexibility within accounting to give a true and fair picture of the accounts so that they serve the interests of users. This is the aim of most entities being reported on. It is, after all, the law, and the requirements of accounting standards. Audit firms regard a client demonstrating this clear objective as ideal as it minimizes their exposure. Users might not be just actual or potential shareholders but a wider community, sometimes called stakeholders. 2 Creative accounting on the other hand uses the flexibility within accounting to manage the measurement and presentation of the accounts so that they serve the interests of preparers. It may be within the flexibility allowed by regulators and does not give rise to
