Accounting

The Financial Numbers Game: Detecting Creative Accounting Practices

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With a certain mind-numbing frequency, users of financial statements—investors and
creditors—find themselves buffeted with announcements of accounting irregularities.
These irregularities are called many things, including aggressive accounting, earnings
management, income smoothing, and fraudulent financial reporting. While they may
vary in the degree to which they misreport financial results, they have similar effects—
financial statements that serve as a foundation for important investment and credit decisions
are incorrect, improper, and worse, misleading.
Companies of all sizes and types, from the start-up to the venerable, from those traded
on the “Bulletin Board” to the “Big Board,” are susceptible to the problems we refer to
here collectively as creative accounting practices. When these acts are discovered,
adjustments are needed. Often, prior-year financial statements must be restated, sometimes
more than once. Unfortunately, many learn of these accounting problems only
after it is too late—after assessments of earning power have been reduced and share
prices have fallen precipitously.
Aware that the proper functioning of our capital markets is dependent on the reliability
and transparency of financial statements, the Securities and Exchange Commission
(SEC) has taken important steps in recent years to rein in the problem. Calling the problem
a “numbers game,” a former chairman of the SEC increased the enforcement actions
taken by the Commission against accounting practices it considered to be errant. As an
example of the SEC’s newly found diligence, during one month the agency instituted
action against 68 individuals at 15 different companies.
Some would say the SEC has gone too far and has begun to question financial reporting
practices that are well within the flexibility afforded by generally accepted accounting
principles (GAAP). This appears to be a minority view. Moreover, attesting to a need
for the SEC’s diligence, the problem of companies employing creative accounting practices
in their financial reporting is continuing. And the problem will continue as long as
there are measurable rewards, including positive effects on share prices, borrowing costs,
bonus plans, and corporate regulations, to be gained by those who seek to play this
financial numbers game

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Publisher

USA : John Wiley & Sons, Inc., 2002

Collation

1-407

Language

English

ISBN/ISSN

ISBN 0-471-37008-8

Classification

NONE

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