Corporate Governance and Creative Accounting: A Comparison Between Spain and the UK

Abstract

A particularly sensitive area of corporate governance is the extent and legitimacy of manipulation of accounting rules. This process, which has come to be known as ‘creative accounting’, involves accountants using their knowledge of accounting rules to manipulate and distort figures reported in the accounts of a business. This process has been seen as arising in the context of the flexibility that is permitted in the USA and the UK in order that financial statements may be ‘fairly presented’ or may give a ‘true and fair view’. By contrast, accounts that are presented in the continental European tradition of legalistic and rigid rules have been seen as less subject to such manipulation. In this article, we compare the experiences of Spain, a country whose accounting approach falls firmly within the continental European tradition, with the United Kingdom. In exploring this issue, we: consider the definition and nature of ‘creative accounting’, placing this within the contrasting Anglo-American and continental European accounting traditions; identify the types of creative accounting technique that can be used, how accounting regulators can control abuse, and compare how controls can be applied within each of the accounting traditions; review the motivations for companies to engage in creative accounting; report some evidence on the extent of, and attitudes towards, creative accounting in Spain and the United Kingdom.