Creative accounting refers to accounting practices that seem to follow the letter of the applicable accounting standards but deviate from the spirit of those standards. The motivation to indulge in these practices is anticipation of rewards which may include higher share prices, improved credit rating resulting in lower borrowing costs, higher incentive compensation for executive management etc. Some of the creative accounting schemes perpetrated by companies include improper revenue and expense recognition, faulty accounting in connection with business combinations, and wrongful use of off- balance-sheet arrangements. These fraudulent schemes can be devastating to users like shareholders, lenders, employees, board of directors and other stakeholders. The spectacular business and financial reporting failures of companies like Enron and WorldCom at the turn of the millennium sent wake-up calls to regulators of capital markets in the US and had an impact on the rest of the world, too. The global debate triggered by these events raised questions regarding the factors driving the widespread creative accounting practices, the checks and balances in the financial reporting, auditing and regulatory environment, identity of the negligent gate keepers and the causes of the failure of the checks and balances. The analysis of financial reporting frauds also offered valuable lessons to the investors, lenders and other stakeholders. The articles, book reviews and case studies put together in this book would provide sufficient material to readers to develop perspectives to find answers to these questions in light of the lessons learnt.
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