As per Investopedia, a premiere online resource for investment education, the term creative accounting means to “capitalize on loopholes in the accounting standards to falsely portray a better image of the company”.
As such, when firms indulge in creative accounting, they often distort the value of the information that their financials provide. That’s why, creative accounting is at the root of certain accounting scandals resulting out of deviation from the set rules, like that of Enron some years ago.
So, creative accounting is a kind of euphemism, wherein a systematic misrepresentation is done. ‘Systematic’ because it is imaginative and unusual. It is a creative play with numbers or say, facts.
However, it also gives rise to questionable ethics. Is creative accounting an acceptable practice for achieving goal(s)? Well, if creative accounting is aimed for distortion, then creative accounting is not a good tool at all. But the same can be used if the goal entails innovation and a sort of extrapolation for something meaningful.
For instance, in any piece of research, especially empirical, creative accounting can help in blending observations and data to reach at new understanding or creating knowledge per se. Creative accounting can also be used in deriving meaning out of numbers through ingenious convergence. Like statistics, which is one of the means to augment creative accounting. Or psephology, through which figures are put up in a constructive style.
Yet, creative accounting usually ends up as creative fudging. It turns into fabrication that is insubstantial and unbelievable. From politics, academics down to media, creative accounting has met misapplication. Most of the politicians fudge numbers to win over the vote-bank. Majority of academicians use stats to manipulate facts. Many media houses use creative accounting to misrepresent reality for their own advantage.
In June 2012, Barack Obama’s Administration presented employment report which cited the unemployment rate as 8.2 percent. This unemployment number had relied on bogus methods and removed a huge segment of unemployed Americans from the data. In fact, no one defined by the Bureau of Labor Statistics as “Persons Not in the Labor Force” had been counted as “unemployed”. This group of unemployed “persons” made up almost 88 million individuals — none of whom counted towards Obama’s unemployment figures. After the real unemployment figures were analyzed, it was found that the actual unemployment rate was 14.9 percent (Fudging the numbers, editorial in Times Free Press).
In its editorial comment The Washington Times wrote, “On main street America, ‘for lease’ signs have replaced grand opening signs. Many malls are vacant and warehouses empty. Middle-class Americans see shrinking paychecks and a rising cost of living. A single massaged, distorted and misleading government datum doesn’t change any of that”. If such creative fudging is not an unthinkable practice in world’s most powerful nation, the same can be no shocker in rest of the world. There are many instances in many countries where official claims sound as preposterous fudging case studies.
Without berating academia, it is but a known fact that researchers usually offer dodgy practices as significant claims. They expound unrelated data as a linkage by relying on acute prevalence of statistics misuse or even through so-called “extrasensory perception” (ESP)! Its like following proverbial “Lies, damned lies, and statistics”.
As for media, the fact-fudging has normally underlined its coverage/reportage of certain sensitive and serious issues. When its election time, many a media-person get busy in simply crunching the numbers, and trailing technical argot of opinion or exit polls. Even media fudges their viewer/reader/user numbers to gain commercial interest or popularity leverage.
Bottomline: Its creative fudging that is much predominant and profound. And people from all walks of life perhaps find it more easier to follow than scrupulous creative accounting wherein no-nonsense minds are more required than numbnuts.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK