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Creative accounting, as a matter of approach, is not objectionable by itself.
However, when unethical elements make intrusion, the resultant accounting details become anything but true and fair. Creativity in such context is like referring to a half glass of water as half-full instead of describing it as half empty. While both statements are factually correct, they paint different picture and thus convey different images. Creativity in company accounting may arise under at least three different financial market conditions. The first is when a company floats its shares to attract investors to subscribe to such shares either at par or at a premium, depending on the financial market evaluation of the company’s future prospects. The second is when the company whose shares are already listed in a stock exchange, wants to paint an attractive picture of its financial conditions so that the shares may be quoted at a premium. Finally, a company having its shares listed in the stock exchange may declare and pay high dividends based on inflated profits through overvaluation of assets, undervaluation of liabilities and change in systems of stock valuation that may boost the image of the company at least in the short run. Unethical considerations in creative accounts have developed to such depths that terms like fraud audit and forensic accounting have gained currency and are becoming new professions. Accounting practitioners and auditors are increasingly required to appear in courts for deposition

This paper is an outcome of a study of Creative Accounting in Bangladesh and global perspectives. Global scenario is included in the study to illustrate the extent of creative accounting practice. Creative accounting could be a blessing or a curse. It is a blessing where something new is introduced to refine the accounting system and therefore becomes an addition to the existing stock of accounting knowledge. It becomes a curse when unethical elements make intrusion. But real world situations tend to show that creative accounting practice is, in most cases, a curse rather than a blessing, and therefore undesirable. The main purpose of the practice is usually to attract unsuspecting investors, or obtain undeserved accounting-based rewards, by presenting an exaggerated, sometimes misleading or deceptive, state of a company’s financial affairs


Accounting practices that follow required laws and regulations, but deviate from what those standards intend to accomplish. Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company. Although creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviors.

Financial statements are one of the most important ways for most business to reveal their performance and status to investors, regulators and employees alike. As an important means of representing the internal information to the public, the making of the statements is also desired to fulfill all the principles, regulations, standards, etc. and ideally should reflect a company’s wealth and activity performance through a transparent accounting system, therefore become the right tool to a fair and true company evaluation.

Although so many restrictions exist, there is still much space to bring into play, in order to appear a more attractive picture facing the public. The key to creative accounting’s growing popularity is the increased international
Business, making the competition between firms fiercer, therefore, the
Temptation for them to ways around the rules at the time set in order to prettify the financial statements become more notable. The pressure on companied to report flattering results is greater than ever before. This necessity mothers the innovations in accounting creativity, which made it increasingly difficult for users of financial information to discern fact from fiction.

Due to the complexity of large financial accounts, creative accounting involves many trickery and at the same time, difficult to apply and detect. It offers a formidable challenge to the accounting profession. While the problem of creative accounting is not new, it was one of the key themes in corporate finance and corporate governance in the 1980s. By the early 1990s, creative accounting was well and truly recognized by national and international regulators as one of their major headaches. The excesses of creative accounting had been widely reported. The challenge of creative accounting goes to the heart of business regulation, business ethics and other fields. Key words

Creative accounting, Bangladesh, financial market, stock exchange, undervaluation of liability, forensic accounting.

Objective of study

As a study for BBA. degree, this paper may only be a relative small scale research project, and it aims to pack up different aspects of creative accounting into a fluent process; discuss and comment on the different areas of creative accounting.

Specifically, the sub-objectives of our dissertation are listed as follows:

1. To provide an overall impression of creative accounting through literature review, making creative accounting as clear as possible;
2. To investigate the public perspective of creative accounting through the form of qualitative research;
3. To circumstantiate the practical application of creative accounting;
4. To penetrate into the practical methods of creative accounting using Enron’s scandal as a case study;
5. To complement the system of creative accounting with other problems such as the detection or the prevention of creative accounting


In this dissertation, various methodologies will be taken to illustrate the study in the field of creative accounting.
Firstly, the literature review of prior researches from journals and other publications are to get better understanding of the existing achievement of previous research.
Secondly, qualitative research method in form of questionnaire based interview can help to further evaluate the basic ideas, effects, incentives, ethics and other problem about creative accounting.
Thirdly, case study is a good way to perform how creative accounting is employed in practice. In this part, the scandal of Enron’s reported financial performance is indispensable to be analyzed as a sample evidence of creative accounting. The information in the three parts will be gained through direct sources from public questionnaire and interview, and also secondary sources comprising of Finance books, Academic journals, former dissertations and internet wealth.

Literature review

The concept of creative accounting is usually used to describe the process through which the accounting professionals use their knowledge in order to manipulate the figures included in the annual accounts. Accounting has been defined as “the art of faking a balance sheet” (Bertolus J.), “the art of calculating the benefits” (Lignon M.), “the art of presenting a balance sheet” (Gounin L.), or “the art of saving money” (Ledouble D.).

The creative accounting appeared in the Anglo-Saxon literature in the 1970s, most often in the papers about the bankruptcy of enterprises and those written by Watts and Zimmerman (1978, 1986, 1990) which represent the foundation of the positive accounting theory. This research trend made the object of several empirical works trying to explain the accounting choices starting from the problem of the political costs that the enterprises are exposed to. More recently, Brown and Steele (1999) have selected a portfolio of 12 accounting techniques, combining also the accounting options with the management decisions. In addition to the political costs, it is emphasized the importance of the activity and risk sector and that of the firm operation, as significant determinants of the creative accounting.

According to Colasse, creative accounting is defined as a cumulus of accounting information practices, at the limit of legitimacy, practised by some economic entities in order to beautify the image of the financial position and the economic-financial performances. Also, Colasse states the fact that these practices arise as a result of the normalization limits but also as a result of the fact that the human creativity does not have limits. We retain the following remark: “it would be wrong to believe that the regularization and the normalization present objectively the accounting portrait of the enterprise. They reveal, explicitly, only the manner in which this portrait has been painted. On the other side though, they leave to the account preparers a manipulation line, in the same time indispensable and irreducible, that they can use according to the considerations deriving from the enterprise’s financial policy or the communication policy.” (Colasse, quoted by Raybaud – Turillo and Teller, 1996).

Almost in the same manner, Trotman (1993) defines creative accounting, appreciating that it is a communication technique having in view the amelioration of the information provided to the investors. Thus, the economic entity is presenting to the investors or to the prospective investors financial statements passed through the filter of some techniques capable of generating a more favourable image on the market but also the illusion of some more attractive results that the normal.

Defining creative accounting through a well known practice, that is “the result of smoothing (smoothing income), Barnea, Ronen and Sadan (1976) appreciate that this makes its presence felt each time the profits have a high fluctuation, unjustified through the economic reality.

A complex vision is provided by Naser (1993) in whose opinion, creative accounting is: “1) the process through which, due to the existence of some breaches in the rules, accounting figures are manipulated and, taking advantage of the flexibility, they choose those measurement practices allowing the transformation of the synthesis documents from what they are supposed to be into what the managers want; 2) the process through which the transactions are structured in such a manner that it allows the “production” of the “desired accounting result.”

Creative accounting from Bangladesh perspective

The study presented in this paper is an exploratory one, based on both primary and secondary sources of information. The secondary sources include published books, journals, periodicals, reports and newspaper. The study’s population was limited to: (1) the list of chartered accountants available in the Institute of Chartered Accountants of Bangladesh (ICAB), (2) the list of cost and management accountants available in the Institute of Cost and Management Accountants of Bangladesh (ICMAB), and (3) the list of university teachers of accounting available in the University Grants Commission of Bangladesh (UGCB).
For the purpose of analysis, the collected data have been tabulated using percentages to show the results of analysis of experts’ views. The analysis based on expert opinion survey was aimed at examining whether the experts’ views agreed with, or differed from, the information based on literature survey. Another purpose has been to study their perception about creative accounting, which appears to be a day-to-day problem in the accounting systems of both developing and developed countries.

Table 1 below shows the breakdown of the population and corresponding study sample size.

Table 1: Breakup of Population and Samples for the Study

|Respondent Groups |Population |Sample Size (% of |
| | |Population) |
|Chartered Accountants |695 |70 (approximately 10%) |
|Cost & Management |621 |60 (approximately 10%) |
|Accountants | | |
|University Teachers of |285 |30 (approximately 11%) |
|Accounting | | |
|Total |1601 |160 (approximately 10%) |

The study adopted simple random sampling (with replacement) technique to draw the samples from the three groups of respondents (population) as shown in the above table. The overall study sample size is approximately 10 percent of the population. Primary information was collected by administering a brief questionnaire consisting of only five questions related to a few relevant issues of creative accounting. Almost all the questions were in structured form, i.e., in closed form. The questionnaire (presented in the Appendix) was administered to (i) seventy chartered accountants, (ii) sixty cost and management accountants and (iii) thirty university accounting teachers, all of Bangladesh. Each of the respondents filled in the questionnaire as it was administered.

Finding analysis

We assume that creative accounting has long been practiced in Bangladesh. But the questions are:
(1) Which organizations practice this?
(2) To what extent is it practiced? These questions should interest investors. Many of the company prospectuses published in Bangladesh are based on creative accounting.

An instance of created reporting of prospectus relates to M. M. Dyeing and Finishing Mills Ltd. According to section 135 of the Bangladesh Companies Act 1994, the detailed ‘matters to be specified in [company] prospectus and reports to be set out therein’ are contained in Schedule-III of the Companies Act. This Schedule requires the auditors to report on: (i) the profits of the company showing clearly the trading results and all charges and expenses incidental thereto excluding income or profits having no relation to the trading for the period covered and excluding also items of profit or income of a non-recurring nature but including amounts appropriated for taxation and reserve and (ii) rates of dividend paid, sources from which such dividends were paid, and classes of shares on which such dividends were paid, and in case dividends were not paid at all, or on any class of shares, a statement of that fact The report shall cover a period of five financial years immediately preceding the issue of the prospectus.

However, in the cited case, the auditors of the company did not audit the financial statements for the four months ended 31 st October 1999, but surprisingly included the unaudited figures in their reports on profits, and also covered unaudited period in their report on dividends. The association of auditors’name/report without audit could mislead prospective investors. However, issuing such report (which could not be thought over before six months) has become a rule in Bangladesh rather than exception, being issued also by the auditors of Pharma Aids Ltd. and Rahim Textile Mills Ltd.

The authors also found the existence of creative accounting in Pharma Aids Ltd., previously referred to. The company had capitalized borrowing costs on long-term loans from 1 July 1994 to 30 June 1997, although it commenced commercial operations on 1 July 1984, thereby violating paragraph 25 of IAS 23 (International Accounting Standard 23: Borrowing Costs) which had been adopted by the Institute of Chartered Accountants of Bangladesh (ICAB) as Bangladesh Accounting Standard (BAS). Clearly, the intention was to convert the accumulated loss of Taka 37.90 lakh on 30 June 1996 into a retained earning of Taka* 0.736 million (US$ 11682.539) on 30 June 1987. Besides this, the company charged “depreciation on fixed assets as per production proportionate ratio”, a method of depreciation never heard of in the manufacturing sectors. This apparently does not conform to IAS 4
(International 1 US$ = Bangladeshi Taka 63.00 Accounting Standard 4: Depreciation) adopted by the ICAB. The results of all these dubious practices were that the company purported to have earned profits during the period July 1,1996 through September 1997 whereas, in reality, it had incurred losses. This apparent profit entitles the company to declare interim dividend at 10 percent. Such dividend declared, not backed by actual profit, is illegal since it is paid out of capital. The creative accounting here made “paper entrepreneurs” appear like “successful entrepreneurs”.

We found another instance of creative accounting in the financial statements of Rahim Textile Mills Ltd. for the six months ended 31 December 1997. The company charged depreciation under declining balance method but limited the depreciation to the capacity utilized proportion – an unheard of depreciation method in the manufacturing sector of Bangladesh. This again does not agree with the IAS 4. Moreover, the company treated the “loss during trial operation” as deferred revenue expenditure to be written off over a period of 5 years although such treatment is not allowed by
Generally Accepted Accounting Practices [paragraph 4 of Statement of Standard Accounting Practice (SSAP) 11 issued by the New Zealand Society of Accountants. Sequel to this practice of creative accounting, the company’s loss for a period at Taka 2.566 million (US$ 40730.158) were transformed into a net profit of Taka 0.440 million (US$ 6984.1269), and a deficit of Taka 3.762 million (US$ 59714.285) shown as retained earning of Taka 0.440 million (US$ 6984.1269).

A traditional case of creative accounting, which is largely practiced in Bangladesh, involves Cenco Incorporated (Medical/Health Division). The company inflated the value of inventory to increase profit by falsifying records. The inflation of profit originally took place for one year and once only. However, it could not be covered in the next year, so larger inflation of profit had to be effected the next year. The time came when much larger inflation could no longer take care of the problem. The company then arranged for a fire outbreak and listed both the missing and obsolete inventory as having been destroyed by the fire. Initially, shareholders benefited from the creative accounting practice; but ultimately suffered when their share prices fell after the fraudulent accounting picture came to light and the company was embroiled in litigation (Alam, 1988: 7).

It is unfortunate that in recent days, issued company prospectuses in Bangladesh have tended to ignore the “notes to financial statements” as well as the information required by BAS/IAS, especially as regards disclosures and accounting policies. However, the Securities and Exchange Commission
(SEC), regulatory authority for public limited companies listed with the stock exchanges in
Bangladesh, is recently working as a constant watchdog in this regard. SEC lodged a criminal case in the second quarter of 2000 with the court of the Chief Metropolitan Magistrate (CMM) against Mark Bangladesh Shilpa and Engineering Ltd. and its directors under section 25 of the Securities and
Exchange Ordinance 1969 for the company’s involvement in overvaluation of its assets and misappropriation or improper utilization of initial public offering (IPO) funds. SEC detected the overvaluation of assets by employing technical experts in this regard. In another case, SEC detected professional misconduct of an auditor (M. A. Fazal & Co.), which, while auditing, ignored false figures and statements given in the annual accounts of Rupam Oil for the year 1996-97.


It is clear from the foregoing discussion that creative accounting practice is found not only in Bangladesh but also in developed countries. . In a country like Bangladesh where the unethical aspects of creative accounting are rampant, the practice of forensic accounting needs to be introduced and recognized. In this regard, Loren Kellogg, a US CPA (Certified Public Accountant) whose “Financial Statement Alert” scrutinizes public companies’ questionable accounting practices, advises investors to examine carefully shareholder letters and management’s discussion and analysis of financials, and to try to read between the lines by looking at four basic areas:(i) extent of a company’s earnings from operations, as opposed to onetime occurrences,(ii) warning signs in the financial statements (iii) changing accounting methods to more favorable one, or using accounting methods different from the ones the competitors use, and (iv) assets or liabilities on (or off) the balance sheet that might affect future earnings.

The result that emerges from the analysis of expert views is that creative accounting has long been in practice in Bangladesh. Most of the companies in Bangladesh create accounts in an undesirable way to attract investors, while some of the companies practice it with a good motive of refining the accounting system. It is a good sign. Another healthy sign is that experts have started feeling that the unethical practice of creative accounting should be stopped by all means.


Professor Dilip Kumar Sen
School of Business
Independent University, Bangladesh (IUB)



Submitted to: Tanzila Ahmed (Lecturer. East West University)
Section: 2

Submitted by:
1. Md Kaisar Rahman 2011-1-10-449
2. Fahad Bin Reza 2009-3-10-054
3. Mridha Mahfuzur Rahman 2009-3-10-021
4. Fareya Tazin 2011-1-10-442


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