Creative Accounting Flashcards
(12 cards)
What is the definition of Creative Accounting according to Chapter 13?
The manipulation of a business’s bookkeeping records and financial statements to achieve an ulterior motive.
How is an Accounting Irregularity defined in Chapter 13?
An item incorrectly included in or omitted from accounting records and financial statements, intended to mislead others.
List common reasons why businesses might prepare misleading accounting information.
-Money laundering
-Ponzi schemes
-Covering up theft
-Obscuring bad news
Name some common accounting irregularities discussed in Chapter 13.
-Falsifying income
-Upfronting income
-Incorrectly deferring expenses
-Failing to impair assets
-Misclassifying liabilities
-Not consolidating entities
What is ‘Upfronting income’ in the context of creative accounting?
Recognizing income before it is actually earned to inflate reported earnings.
What are key countermeasures against accounting irregularities?
-Financial regulation
-Corporate governance codes
-Improved accounting standards
-Auditing
-Accounting ethics
-Thorough financial statement analysis
How are Related Parties defined in Chapter 13?
People or entities with whom businesses must disclose transactions, including terms and conditions.
In financial statement analysis, what are key signs of possible irregularities?
-Low quality of earnings
-Seemingly low tax rates
-Evidence of unrecognised liabilities
-Questionable related party transactions
Why is scrutinising related party transactions important in combating creative accounting?
They can be used to hide irregularities or manipulate financial results, so careful review helps detect misleading reporting.
How does Chapter 13 link the Sub-prime crisis to accounting irregularities?
Some irregularities contributed, but broader causes included overleveraged markets and complex derivatives misrated by agencies.
What change did the IASB make in response to the 2007/8 financial crisis?
Tightened IFRS 9 on financial instruments to improve financial reporting standards.
