Creative Accounting, Fraud and International Accounting Scandals

The four broad accounting strategies for creative accounting are as follows:

• Increase income
  
• Decrease expenses
  
• Increase assets
  
• Decrease liabilities
  

The author of the bank has done a study and found that the two most popular ways of boosting income were to exploit transactions with related parties and to recognize sales prematurely.

The following are the techniques used by the companies involved in accounting scandals:

• WorldCom – capitalization of expenses (manipulation of accounting provisions for estimated costs was the second most popular approach for expense reduction)
  
• Bre-X Minerals – asset inflation through the puffin up the value of inventory through the claim of having found a massive Indonesia gold deposit
  
• Enron – off-balance sheet financing
  

Besides looking out for the above accounting manipulations, investors also need to consider corporate governance norms, remuneration policies and the general regulatory context to make a decision on whether there is any creative accounting being used in the companies' books.