Chapter 13

Creative accounting

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Introduction

Creative accounting became a hot topic in the late 1980s. Attention was drawn, by commentators such as Ian Griffiths (author of Creative Accounting), to how businesses use the flexibility inherent in accounting to manage their results. In itself, flexibility is good because it allows companies to choose accounting policies that present a ‘true and fair view’. However, by the judicious choice of accounting policies and by exercising judgement, accounts can serve the interests of the preparers rather than the users. Creative accounting is not illegal but effectively, through creative compliance with the regulations, seeks to undermine a ‘true and fair view’ of accounting. Creative accounting can involve manipulating income, expenses, assets or liabilities through simple or exceedingly complex schemes.

The current regulatory framework can partially be seen as a response to creative accounting. It attempts to ensure that accounting represents economic reality and presents a true and fair view of the company's activities. However, new regulations bring new opportunities for creative compliance and thus creative accounting. As Real-World View 13.1 shows, even well-known companies are accused of questionable accounting.

The Microsoft example involves an interesting point. Should companies be prudent in good times so that they have reserves to fall back on in bad times? If they do so, they will be adopting different accounting policies depending on their results. In effect, they would be prudent. Many believe this is good, for example, that if banks, in the recent financial crisis, had been more prudent, they would have been in a stronger position to cope with the credit crunch. However, prevailing practice in accounting does not permit such a prudent approach.

Enron, once the seventh biggest US company, which went into liquidation in 2001, is believed to have indulged in creative accounting. Other US companies such as WorldCom have been involved in accounting scandals in which creative accounting has played a contributory role. Indeed, Mulford and Comiskey cite many more US companies (see Real-World View 13.2). Creative accounting also seems to have played an important role in banking failures in the recent credit crunch.

Definition

Creative accounting is a slippery concept, which evades easy definition. As Definition 13.1 shows, there are perhaps three key elements in creative accounting: flexibility, management of the accounts and serving the interests of managers. Sometimes, however, creative accounting is in the interests of users too, for example, where creative accounting keeps profits high and thus enables a company to maintain its share price and maintain or increase its dividend payments.

(i) Flexibility

Accounting is very flexible. There are numerous choices, for example, for measuring depreciation, valuing inventory or recording sales. This flexibility underpins the idea that the financial statements should give a ‘true and fair view’ of the state of affairs of the company and of the profit. Accounting policies should thus, in theory, be chosen to support a true and fair view. In many cases they are, but the flexibility within accounting does sometimes enable managers to present a more favourable impression of the company's performance than is perhaps warranted. Indeed, within accounting there is a continuum (see Figure 13.1).

This continuum starts with a completely standardised accounting system. This gives way to flexibility so as to present a true and fair view. Next we have flexibility to account creatively. Finally, there is fraud, which involves non-compliance with the regulations rather than ‘bending’ them. In the US, for example, WorldCom has been accused of fraudulently overstating profits by $3.8bn (Financial Times, 26 June 2002, p. 1). Parmalat, Italy's eighth largest company in 2003, has been the centre of a corporate scandal. Executives were alleged by prosecutors to have used a forged Bank of America document to vouch for $5 billion in assets and claimed the company had sold enough milk to Cuba to provide every Cuban with 55 gallons of milk for the year (Christopher Erdmann, The Parmalat Scandal: Italy's Enron (2004)).

(ii) Management of the Accounts

Unfortunately, in practice, the directors may choose accounting policies more to fulfil managerial objectives than to satisfy the requirements of users for a ‘true and fair view’. Accounting thus becomes a variable to be managed rather than an instrument for providing true and fair information.

(iii) Interests of Managers

Accounting theory suggests that the aim of the accounts is to provide financial information to users so that they can make decisions. However, creative accounting privileges the interests of managers. Users may, indeed, benefit from creative accounting, but managers will definitely benefit.

Managerial Motivation

Managers have incentives to adopt creative accounting. Essentially, managers are judged, and rewarded, on the performance of their companies. It is, therefore, in managers' interests that their companies meet expectations. For example, if managers have profit-related bonuses, it makes sense for them to maximise their profits so they get bigger bonuses. Other managerial incentives might be the ownership of shares and share options, the need to smooth profits or to manage gearing. Mulford and Comiskey (2002, p. 6) cite the case of Green Tree Financial Corp whose annual share bonus was $28.5 million in 1994, $65.1 million in 1995 and $102.0 million in 1996. Such bonuses are exceedingly generous.

Shares and Share Options

Managers may own shares. They also may have share options which allow them to buy shares today at a set price and then sell them for a higher price at a future date. If the stock market expects a certain amount of profit from a company, then managers may wish to adopt creative accounting to deliver that profit. Otherwise, the share price will fall and the managers will lose out.

Profit Smoothing

The stock market prefers a steady progression in earnings to an erratic earnings pattern. Companies with erratic earnings typically have lower share prices than those with steadier performances. Their lower share price makes these companies more vulnerable to takeover than companies with smoother profit trends. Managers of companies that are taken over may lose their jobs. Therefore, managers have incentives to smooth profits. Current shareholders are also likely to benefit from profit smoothing as the share price remains high.

Manage Gearing

As well as managing profits, companies have incentives to manage gearing or conceal debt. Companies may wish to borrow money. However, existing borrowers may put restrictions on the amount of any new debt that can be raised. Managers may attempt to circumvent these restrictions using creative accounting. Enron, for instance, attempted to conceal the amount of its liabilities.

The managerial incentives vary from firm to firm. For example, in some regulated industries (such as gas or water), managers may actually wish to reduce revenue and profits so as to stop the government putting price restrictions on them. In many cases, managers will wish to increase profits or assets. This can be done by increasing income or decreasing expenses in the case of profits and increasing assets or decreasing liabilities in the case of net assets. In other cases, managers will wish to smooth profits so as to provide a steady upward trend of profits so as to satisfy the needs of the stock market. The key point about managerial incentives is that they encourage managers to serve their own or the company's interests rather than present a true and fair view of the company's performance.

Methods of Creative Accounting

There are innumerable methods of creative accounting. These arise mainly from the flexibility of accounting and the existence of so many acceptable accounting policies. If you change your accounting policies, you will change your results. Indeed, as Robert Townsend suggests in Soundbite 13.3, one easy way of creative accounting is continually to change your accounting policies. In the US, WorldCom, which collapsed in 2002, was accused of repeatedly restating its accounts. However, the consistency concept does to some extent limit companies' abilities to do this.

Many creative accounting procedures are complex and often undetectable to the analyst. In this section, we will look at five of the more straightforward techniques. The aim is to give some illustrative examples rather than to present a comprehensive list. The worst excesses of creative accounting have been curbed by accounting standards and regulations that have been developed to try to ensure that the accounts correspond to economic reality. In many cases, some of the techniques listed will be used by management taking advantage of accounting's flexibility to give a true and fair view of the company's activities. In other cases, these techniques will be used creatively. To the onlooker it is generally difficult to distinguish these two contrasting uses. Motivation is the key distinguishing feature. Where managers attempt to serve their own interests rather than present a true and fair view, creative accounting is occurring.

Those readers who wish a more in-depth look at the subject are referred to Ian Griffiths, New Creative Accounting, Terry Smith's Accounting for Growth, and more recently my book, Creative Accounting, Fraud and International Accounting Standards (Michael Jones).

(i) Inflating Income

The problem is that revenue recognition is not as precise as cash flow (see Real-World View 13.3). When should we recognise a sale as a sale? This may, at first, seem a silly question. However, the date of sale is not always obvious. For example, is it when (i) we dispatch goods to a customer, (ii) we invoice the customer, or (iii) we receive the money? Normally, it is when we invoice the customer. However, in complex businesses there is often a fair degree of latitude about revenue recognition. If you take a big construction project (like Multiplex's building of Wembley Stadium), for example, when should you recognise sales and take profits? There are rules to help in profit determination, but these rules still permit a good deal of flexibility. Another troublesome area associated with revenue recognition is warranty provision (i.e., setting aside money to deal with customer returns). You can deal with this, in advance, and estimate a provision or deal with it on an actual return-by-return basis. Moreover, warranties can be treated as a reduction in revenue or as an expense. The differing treatments can result in differing profits.

(ii) Inventories

Inventories provide a rich area for the creative accountant. The key feature about inventories is that if you increase your inventories you increase your profit (see Figure 13.2). The beauty of inventories is also that, in many businesses, inventories are valued once a year at an annual stock-take. When carrying out these stock-takes, it is relatively easy to take an optimistic or a pessimistic view of the value of inventories.

(iii) Depreciation

Depreciation is the allocation of the cost of property, plant and equipment over time. It is an expense recorded in the income statement. If the amount of depreciation changes then so will profit. The depreciation process is subject to many estimations, such as the life of the asset, which may alter the depreciation charge. A simple example is given in Figure 13.3 below. In essence, lengthening expected lives boosts profits while reducing them reduces profits. If management lengthens the assets' lives because it judges that the assets will last longer, this is fair enough. If the motivation, however, is to boost profits then this is creative accounting.

The pace of technological change creates shorter asset lives. It would be assumed, therefore, that most companies would reduce their expected asset lives. However, as UBS Phillips and Drew point out below, in Real-World View 13.4, this is not necessarily so.

Finally, Smith (1992) draws attention to British Airports Authority's (BAA) decision to lengthen its terminal and runway lives. Runway lives lengthened from 23.5 years in 1990 to 100 years in 1998. Annual depreciation was thus reduced.

(iv) Brands

Brand valuation is a contentious issue within accounting. Some companies argue that it is appropriate to value brands so as better to reflect economic reality. By contrast, other observers believe that valuing brands is too subjective and judgemental and that the real motive behind brand valuation is for companies to boost asset values on the statement of financial position. Brand accounting is a relatively new phenomenon in the UK. The idea is that, in many cases, brands are worth incredible amounts of money (think, for example, of Guinness or Kit Kat). Indeed, it is estimated that Coca-Cola's brand name adds £2bn additional value to the company per year (Fiona Gilmore, Accountancy Age, May 2001).

Traditionally, brands have not formally been recognised as assets. They are, however, as Soundbite 13.4 shows, very valuable. From the mid-1980s, UK companies such as Grand Metropolitan and Cadburys started to include brands in their statements of financial position. These brands are assets and help to boost the assets in the statement of financial position. They are not amortised (i.e., written off).

Traditional accountants are still suspicious of brands. This is because they are difficult to measure and, in essence, they are subjective. The situation in the UK is, therefore, something of an uneasy compromise. Acquired brands can be capitalised (i.e., included in the statements of financial position). However, companies are not permitted to capitalise internally-generated brands. Overall, some companies capitalise their brands and some do not. There is also a great variety of ways in which brands are valued. In other words, there is great potential for creativity.

(v) Capitalisation of Costs such as Interest Payable

The capitalisation of costs involves the simple idea that a debit balance in the accounts can either be an expense or an asset. Expenses are deducted from revenue and reduce profit. Assets are capitalised. Property, plant and equipment are particularly important in this context. Only the depreciation charged on property, plant and equipment is treated as an expense and reduces profit. Therefore, it will often benefit companies to treat certain expenses as property, plant and equipment.

An example of this was until very recently interest costs. Where companies borrow money to construct property, plant and equipment, they can argue, and often do, that interest on borrowing should be capitalised. However, some commentators, such as Phillips and Drew (1991) Accounting for Growth, p. 10, found this a dubious practice. Virtually every UK listed property company, with the notable exception of Land Securities, made use of capitalised interest in the 1990s (and often other costs as well) to defer the impact of developments on profits. While commercial property prices were rising rapidly, investors and banks did not worry about the amount of interest being capitalised. Indeed, Phillips and Drew pointed out that some UK companies would actually make a loss, not a profit, if they did not capitalise their interest. In the US, in 2001 WorldCom improperly capitalised huge amounts of expenses (this is shown in Real-World View 13.5).

The capitalisation of interest is, however, now much more restricted as under IFRS, there is now provision that where the asset is not yet in the location suitable for its intended use, borrowing costs can be capitalised as long as they are directly attributable. However, there is still obvious room for manoeuvre in defining terms such as directly attributable, asset and location and condition. In addition, there is still scope to capitalise some development costs such as in computer software.

Example

In order to demonstrate that creative accounting can make a difference, an example, Creato plc, is presented in Figure 13.4 (see opposite page 384). Adjustments are made for revenue, inventories, depreciation and the capitalisation of interest.

Real Life

It should be stressed that creative accounting is very much a real-life phenomenon. Extensive research has demonstrated its existence. Of particular interest are two empirical studies: Accounting for Growth and Company Pathology. Although dating from the 1990s, these studies, which have not been repeated more recently, demonstrate quite clearly the existence of creative accounting. Accounting for Growth was published twice: first, by fund managers UBS Phillips and Drew in 1991 as a report and second by Terry Smith in 1992 as a book. It caused considerable controversy – in fact, it resulted in Terry Smith, one of the analysts responsible for the research, leaving UBS Phillips and Drew. Essentially, as Real-World View 13.5 shows, UBS Phillips and Drew wished to draw attention to the recent growth in creative accounting.

UBS Phillips and Drew analysed 185 UK listed companies. They identified 11 innovative (i.e., creative) accounting practices and drew up an accounting health check. They found that 165 companies used at least one innovative accounting practice, 17 used five or more and three used seven (see Real-World View 13.6). Interestingly, two of the high-scoring companies subsequently went bankrupt: Maxwell Communications and Tiphook.

In Company Pathology (1991), County NatWest Woodmac studied 45 ‘deceased’ companies from 1989–90. They drew attention to questionable accounting practices, such as the capitalisation of interest. In only three out of the 45 cases did the audit report warn of the impending disaster. In only two out of the 45 cases did the pre-collapse turnover fall. Finally, in only six out of 45 cases did the last reported accounts show a loss. County NatWest Woodmac were quite scathing in their overall assessment. ‘A downturn in earnings per share is a lagging rather than a leading indicator of trouble. Accounting Standards give companies far too much scope for creative accounting. One set of accounts were described by an experienced and well qualified fund manager as “a complete joke”. Auditors' reports seldom give warning of impending disaster’ (p. 4).

In Germany, a real study of the findings of the German Financial Reporting Enforcement Panel (FREP) from 2005–6 had similar findings as Real-World View 13.7 shows. However, in the UK, given the active attention paid by the Accounting Standards Board to curbing creative accounting since the 1990s, many of the worst abuses have now been curtailed.

A recent book has looked at this area in great depth (Michael Jones: Creative Accounting, Fraud and International Accounting Scandals). This book looks at accounting scandals that occurred across 13 countries ranging from developed countries such as UK and US to developing countries such as China and India. Fifty-four individual cases were covered ranging from well-known, high-profile accounting scandals such as Enron, WorldCom and Polly Peck to other scandals that are less known globally, but scandals that were important in individual countries such as Bank of Crete in Greece, Comroad in Germany or Fermenta in Sweden. Individual countries were written by individual country experts. The book also showed how accounting scandals were perennial in nature with the earliest known scandal dating back to the second millennium BC in Mesopotamia.

The book isolated some motives for the scandals such as covering up bad performance and also for personal benefit. In addition, in many scandals there were charismatic persuaders such as Robert Maxwell in the UK or Bernard Ebbers at WorldCom. In the book, several popular methods of creative accounting and/or fraud were noted which were frequently used by companies such as recognising revenue early (premature revenue recognition), capitalising expenses, inflating inventory and off-balance sheet financing. In most cases, there were severe failings in either, or often both, internal control and external audit.

The book concluded by setting out a theoretical model to reduce creative accounting and fraud (see Figure 13.5). This showed that the potential for creative accounting and fraud was enhanced by strong motives (such as personal incentives or market-based incentives) and environmental opportunities (such as lax rules and regulations, poor supervision and inappropriate reward structures). It could potentially be reduced by environmental constraints and by better enforcement and higher ethical standards. Many companies already have a code of ethics and some examination bodies, such as the ACCA, have incorporated ethics modules into their examination syllabuses.

Case Studies

(i) Polly Peck

An interesting example of a spectacular company collapse where creative accounting was present is Polly Peck. Polly Peck's demise is well-documented not only in Terry Smith's Accounting for Growth, but also in Trevor Pijper's Creative Accounting: The Effect of Financial Reporting in the UK.

Essentially, Polly Peck was one of the fastest expanding UK firms in the 1980s. It was headed by a charismatic chairman, Asil Nadir. It started off in food and electronics, and expanded rapidly. County NatWest Wood Mackenzie calculated that in the year to November 1989, Polly Peck's shares had grown faster than any other UK company. The 1989 results were full of optimism. For example, profit before tax had increased from £112 million to £161 million.

Indeed, the optimism continued in the 1990 interim results. Eleven days after their publication, and six days before the collapse, Kitcat and Aitken (city analysts) reported that profits would increase substantially.

The collapse of Polly Peck cannot be attributed solely to creative accounting. There was fraud and deception and, in addition, there was the blind faith of bankers and shareholders. The signs were there for those who wished to look. For example, debt rose from £65.9 million in 1985 to £1,106 million in 1989. However, creative accounting did play its part in two key areas. First, Polly Peck capitalised the acquired brands, such as Del Monte, and thus strengthened its statement of financial position. Second, and more seriously, the company indulged in currency mismatching. This is explained in Figure 13.6. This flattered Polly Peck's income statement at the expense of seriously damaging its statement of financial position. Asil Nadir, Chairman of Polly Peck, escaped to North Cyprus but in 2010 returned to the UK to face trial. He was convicted of theft in August 2012.

(ii) Enron

The spectacular collapse of Enron in December 2001 has brought creative accounting once more centre stage. Enron, at one time, was the seventh biggest US company. However, from August 2000 its share price began to fall as a result of doubts about the strength of its statement of financial position and significant sales of shares by managers. Enron's main business was to supply and make markets in oil and gas throughout the world. Enron first made profits on investments in technology and energy businesses followed by losses. Following these losses, Enron built up huge debts which have been estimated at $80 billion. From the accounts it was not obvious that these liabilities existed. They were buried in rather complex legal jargon (see Company Snapshot 13.1).

In order to manipulate income, to avoid reporting losses and keep its debts off the group's statement of financial position, Enron set up special purpose entities (SPEs). Under US regulations if the SPEs were not controlled by Enron and if outside equity capital controlled at least 3% of total assets then Enron would not have to bring the SPEs into its group accounts. It would thus not disclose its debts. Investors would not therefore realise the net indebtedness of the company. Many SPEs appear not to have been incorporated into the group accounts quite legally. However, in other cases it is alleged that control was held by Enron not by third parties and that Enron had provided third parties with funds so that the 3% was not truly held independently. If this is the case, there was prima facie false accounting and questions began to be raised about the role of Arthur Andersen, the company's auditors. The role of the auditors as independent safeguards of the investors appears to have broken down. Finally, it has been reported in the press that Enron was receiving up-front payments for the future sales of natural gas or crude oil and effectively treating loans as revenue.

Overall, therefore, Enron demonstrates that even well-known companies still indulge in creative accounting. In Enron's case, however, like that of Polly Peck, the borderline between creative accounting and fraud became blurred.

Enron is the most famous case of creative accounting and has even given rise to a theatre production. In this, as Soundbite 13.6 shows, Andy Fastow, the chief financial officer, is shown as a key player.

(iii) Bank of Crete

The Bank of Crete was covered by George Kontos, Maria Krambia-Kapardis and Nikolas Milonas (as a chapter in Jones, Creative Accounting, Fraud and International Accounting Standards). It is an excellent example of how one man was able to take advantage of a weak internal control system. Koskotas, a Greek, was a fraudster. From the ages of 15 to 25 he worked in the US and committed 64 mainly forgery offences as well as forging academic qualifications. Koskotas then returned to Greece. In 1979, he began work for the Bank of Crete. He impressed his bosses and became head of the bank's internal audit department in 1980. He then began to embezzle money from the bank. He stole US$1,155,000 and deposited them with the Westminster bank. His theft was not discovered and he then began systematically to misappropriate a total amount of what appears to have been about US$32 million. He managed to do this by exploiting weak internal controls, for example, reconciliations of inter-branch accounts. When he was suspected he gathered together a group of employees and systematically forged letters and documents to cover his tracks. Eventually Koskotas was detected and found guilty. He served a 12-year jail sentence.

(iv) Banks

The role of creative accounting in the recent bank failures worldwide has caught the attention of many commentators. This is demonstrated by Simon Norton in Real-World View 13.8.

Banks, in particular, used many complex financial instruments such as derivatives and Collaterised Mortgage Obligations (CMOs) where groups of mortgages are bundled together and sold on to third parties. There were also collateralised debt obligations (CDOs) which allowed banks to shift debt off the statement of financial position and credit default swaps (CDSs). It is not necessary to go into the details here, indeed, some of the creative instruments were so complex that the Board of Directors often did not understand them. However, the end result was that the accounts often became very difficult to understand. In many cases, substantial liabilities were kept off the statement of financial position. It is not clear how much the use of these complex financial instruments or creative accounting contributed to the difficulties in which the banks found themselves or to specific instances of banking and financial institution scandals such as Lehman Brothers, Madoff Securities International or Bear Stearns. However, it does seem to have played a part. For instance, Lehman Brothers appears to have used the flexibility permitted by US Generally Accepted Accounting Principles to avoid writing down the value of its assets. As Real-World View 13.9 shows, Lehman's creativity exploited the weaknesses in US accounting standards. Meanwhile, Bear Stearns appears to have entirely lawfully used creative accounting to convert high-risk assets into lower risk repackaged products.

Creative Presentation

As well as creative accounting, companies can present their accounts in a flattering way. One of the ways they can do this is by using graphs. There are three main ways graphs can be used: selectivity, measurement distortion and presentational enhancement. For example, they may use graphs only in years when the company has made a profit (the graph will show a rising trend). In selectivity, it has been shown by countless research studies (see Beattie and Jones, 2008) that companies select those graphs that will give a favourable rather than an unfavourable view of their financial performance. Measurement distortion is where graphs may be deliberately drawn so as to exaggerate a rising trend. In essence, the increase in the columns in a graph is drawn so that they are greater than the increase in the data. This may, for example, be done by using a non-zero axis. An example of creative graphical presentation is shown in Real-World View 13.10. In particular, it should be noted that the earnings per share graph is inconsistent with the other three. It is for three years not four and has a non-zero axis. The overall result is that it perhaps presents a more favourable view of the company's results than would otherwise be warranted. Finally, graphs may be subject to presentational enhancement, for example, attention may be drawn so as to place undue emphasis on certain features of the graph such as the last two columns in Real-World View 13.10 which have darker shading, (particularly 1989).

Controlling Creative Accounting

One of the key objectives of the UK's Accounting Standards Board, which was set up in the 1990, was to control creative accounting. The International Accounting Standards Board also shares this concern. As Real-World View 13.11 shows, creative accounting leads to regulation.

Since 1990, there has been a concerted attempt by regulators to curb creative accounting. Undoubtedly, they have made substantial progress in many areas. Companies now have much less scope for creativity, for example, when dealing with leased assets. However, it is often a case of two steps forward, one step back. Indeed, there is a continuing battle between the regulators and creative accountants. Some merchant banks actively advise companies on ‘creative compliance’. There is an evolving pattern of creative compliance from avoidance, to rules, back to avoidance. Atul Shah documents this using the case of complex convertible securities issued by listed UK companies. He concludes: ‘[r]egulators were slow to respond, and when they did make pronouncements, companies once again circumvented the rules with the help of various professionals. A “dialectic of creativity” is created, from avoidance to rules to avoidance again’ (Shah, 1998, p. 36). This continual struggle between companies and regulators causes a creative accounting ‘arms race’. In the US, after Enron and WorldCom, for example the Sarbanes-Oxley Act in the US introduced substantial new legislation.

Conclusion

Creative accounting emerged into the limelight in the 1980s. However, it is still alive and kicking today. As the collapse of Enron in 2001 clearly demonstrated, managers have incentives to manage their accounting profits so that they serve managerial, rather than shareholder, interests. This is possible because of the flexibility within accounting. There are numerous methods of creative accounting: some are extremely complex and others very simple. When used excessively, creative accounting can be positively dangerous; for example, it has contributed to corporate collapses. The regulators attempt, through accounting standards, to curb creative accounting. However, there is an ongoing battle as companies seek ways around the regulations.

Selected Reading

1. Accounting for Growth
This report was a real accounting bombshell. It documents the use by 185 UK companies of 11 innovative accounting practices. The original report (see (a) below) was issued by UBS Phillips and Drew. Then Terry Smith published (b) below after he left UBS Phillips and Drew. Those who can't get hold of the original report/book, or who want a quick summary, could try Jones (c).

(a) UBS Phillips and Drew (1991) Accounting for Growth.

(b) Smith, T. (1992) Accounting for Growth (Century Business).

(c) Jones, M.J. (1992) ‘Accounting for Growth: Surviving the accounting jungle’, Management Accounting, February, pp. 20–22.

2. County NatWest WoodMac (1991) Company Pathology.
This report provides an interesting study into creative accounting by 45 companies.

3. Griffiths, I. (1986) Creative Accounting (Sidgwick and Jackson) and (1995) New Creative Accounting (Macmillan).
Both very good reads which provide a journalist's view of the debate.

4. Pijper, T. (1993) Creative Accounting: The Effect of Financial Reporting in the UK (Macmillan). Another good overview of creative accounting.

5. Shah, A.K. (1998) ‘Exploring the Influences and Constraints on Creative Accounting in the United Kingdom’, The European Accounting Review, Vol. 7, No. 1, pp. 83–104. This article provides a good insight into the evolving struggle between regulators and creative accountants.

6. Mulford, C. and Comiskey, E. (2002) The Financial Numbers Game. Detecting Creative Accounting Practices. John Wiley and Sons Inc., New York.
This book provides a wonderful insight into creative accounting in the US. Well researched and well written. It documents a large number of high profile cases. It should be noted that this book predates both Enron and WorldCom.

7. Jones, M.J. (2010) Creative Accounting, Fraud and International Accounting Scandals (John Wiley & Sons Ltd).
This book provides an original and interesting look at global business scandals. It investigates 54 accounting scandals from 12 countries: Australia, China, Germany, Greece, India, Italy, Japan, Netherlands, Spain, Sweden, UK and the US. The author also writes on the background to creative accounting and fraud and draws some conclusions.

8. Beattie, V.A. and Jones, M.J. (2008). Corporate Reporting using Graphs: A Review and Synthesis, Journal of Accounting Literature, Vol. 27, pp. 71–110.
This book provides an overview of 15 studies into graphs demonstrating widespread evidence of selectivity, measurement distortion and presentational enhancement.

Go online to discover the extra features for this chapter at www.wiley.com/college/jones