20 Mar

Creative Accounting or Financial Statement Fraud?

Companies engaged in financial statement fraud sometimes use creative phrases to legitimize or cover up what they’re doing. Examples include:

  • Aggressive accounting – We’re following the rules, but pushing the limits to make the financial statements look as good as possible.
  • Earnings management – We’re doing our best to “manage” earnings and make sure that the numbers are in line with the expectations of investors.
  • Income smoothing – We’re leveling out the earnings to keep the numbers consistent from period to period.

This “creative” accounting is sometimes justified by people who say that the company is still following the rules, and just using the rules to their benefit.

Aggressive practices like this often cross the line into fraud, as companies are purposely manipulating the numbers to paint the picture they want to see, rather than show the reality of the numbers.