Creative Accounting
Essay title: Creative Accounting
Creative accounting refers to accounting practices that deviate from (the spirit of ) standard accounting practices. They are characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities. Sometimes the words “innovative” or “aggressive” are used.
The term is also (used more seriously and disparagingly) to refer to systematic misrepresentation of the true income and assets of business organizations. “Creative accounting” on this scale has led to a number of recent accounting scandals, and many proposals for accounting reform.
Creative accounting is also used by smaller companies for tax saving purposes and large companies for meeting bonuses or shareholders expectations. One commonly accepted incentive for the systemic over-reporting of corporate income was the granting of stock options as part of executive compensation packages. Since stock prices reflect earning reports, stock options could be most profitably exercised when income is exaggerated, and the stock can be sold at an