Creative Accounting: An Overview of its Practices Where are We Heading Now?

Abstract

Accounting plays a significant role in the contractual relations that form the modern corporation, presumably to mitigate agency costs. However, it is argued that preparers are likely to have incentives to convey self-serving information is also likely to impose costs on financial statement users. This practice known as creative accounting which referring to the process of taking deliberate steps within the constraints of GAAP to bring about desired level of reported earnings. Even though not all accounting choices involve creative accounting or earnings management, and the term earnings management extends beyond accounting choice, the implications of accounting choice to achieve managers’ personal goals are consistent with the notion of earnings management. Accounting is a medium for managers to disseminate privately held information through accounting information releases, and the specific accounting method choice can play a key role in that communication process. In addition to that, regulation of accounting affects the quality and quantity of financial disclosures, and thus affecting the quality of decision making of the users. This paper critically discusses the common motivation, techniques, the implications, potential mitigation mechanisms as well as reviews some of the most controversial accounting scandals in Malaysia and worldwide. We conclude that earnings management are still a very common practice despite the current development in various mitigating mechanisms.