Definition of Creative accounting:
The exploitation of loopholes in financial regulation in order to gain advantage or present figures in a misleadingly favourable light.
Use of unorthodox massage parlor techniques which, while following provisions of GAAP, paint a desired (negative or positive, as the case may be) picture of a firms finances. For example, selling an asset (whose market value is high but book value is low) to create non-operating profit that offsets operating loss. Unlike cooking the books, creative accounting is generally legal. Euphemistically also called financial engineering or earnings management. See also creative financing.
A primary benefit of public accounting statements is that they allow investors to compare the financial health of competing companies. However, when firms indulge in creative accounting, they often distort the value of the information that their financials provide.
Creative accounting consists of accounting practices that follow required laws and regulations, but deviate from what those standards intend to accomplish. Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company. Although creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviors.
How to use Creative accounting in a sentence?
- Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company.
- Creative accounting tricks vary in nature and consistently evolve as regulations change.
- Tweaking figures can lead to higher bonuses for directors, help convince a lender to give a firm a loan and inflate the company’s valuation.
- Investors should always be skeptical and read financial statements from top to bottom for any signs of foul play.
Meaning of Creative accounting & Creative accounting Definition