7.11 Earnings management or creative accounting Flashcards

1
Q

What has historically been the main cause of historic accounting scandals?

A

Fraud

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2
Q

What are the two sub-types of fraud?

A
  • fraudulent financial reporting (aka intentional misstatement)
  • misappropriation of assets (theft)
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3
Q

Is it the responsibility of the auditor or the legal system to determine whether fraud has occurred?

A

The legal system, however auditors should remain vigilant.

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4
Q

What is an “error” in accounting?

A

An unintentional misstatement in the financial statements

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5
Q

Is an “error” in the financial statement considered to be fraud?

A

No, unless intentional.

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6
Q

What are some common accounting irregularities considered to be fraud?

A
  • manipulation, falsification or alteration of records of documents
  • misinterpretation in, or omission from the financial statements of events, transactions or other significant information.
  • misapplication of accounting principles relation to amount, classification etc.
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7
Q

What are some examples of misappropriation of assets (theft)?

A
  • stealing tangible/intangible assets
  • embezzling receipts
  • making payments for the purchase of non-existent goods.
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8
Q

What is creative accounting?

A

The deliberate manipulation of figures for a desired result.

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9
Q

What is “off-balance sheet” financing?

A

A form of (creative) financing where large capital expenditures and the associated liability (such as operating leases) are kept off the balance sheet.

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10
Q

What is “cut off liability”?

A

Creative accounting where a company delays invoicing in order to move revenue to the following year.

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11
Q

Why does revaluation of non-current assets allow creative accounting?

A

The non-current assets can be revalued in a favorable manner.

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12
Q

What is window dressing (creative accounting)?

A

Transactions are passed through the books at year end to make the accounts more favourable. E.g. repaying a loan at year end and then immediately taking out another.

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13
Q

How can creative accounting be achieved through accounting policy changes?

A

The change can be done to make the figures more favourable. This is usually a last resort as companies are limited in how often they change policy.

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14
Q

What is meant by “manipulation of accruals, prepayments and contingencies” in creative accounting?

A

A company may only disclose the possibility of a liability, even though its eventual costs may be substantial.

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15
Q

What regulatory changes have been made to prevent creative accounting?

A

1 IAS 27 ensures consolidation of subsidiary and parent accounts, preventing exclusion of highly-geared subsidiaries.
2 IFRS 16 ensures proper disclosure of leased assets, making it difficult to keep liabilities off the balance sheet
3 IAS 37 ensures proper accounting and disclosure of provisions, contingent liabilities and contingent assets.

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