Hmmmm..

In the longest time, finally the feeling has came back...and the flowers are blooming again...

Finally I realized that I have a feeling for someone after so long... But it is a mission impossible for me to pursue it further. It is just impossible..a mission which I want to move forward with..but it is also the mission that I will need to endure to make the flowers bloom again..can i endure it?

The Downturn of World Financial Crisis

The Downturn of World Financial Crisis

Creative Accounting

CREATIVE ACCOUNTING defined as a euphemism that practices by specific groups of managers with drawn intention by altering corporate accounting statement with the actual financial statement. Deviating from the basic rule of accounting with specific intention by falsifying data is against the law.

Account Misrepresentation
Such activities that lead to account misrepresentation are done systematically by managers to attract investment from stakeholders in becoming their stockholders. Managers falsified data in several ways namely inflating profits in assets and net income statement or drastically understate earnings for the benefit of the higher management.
In 2002, Quest Communication and Freddie Mac, United States of America was found guilty of creative accounting. These two Wall Street giants had illegally misrepresented and declared their financial statements and status. Quest Communication inflated their revenues to attract investors into the accounts. While Freddie Mac understates their earnings with the intention of the top management benefiting from the earnings while posting high annual bonuses among themselves.

Corporate Integrity and Principle of Prudence
The question of corporate integrity and negligence surfaces in the account misrepresentation occurred in the strings of creative accounting scenes among the Wall Streets giants right after the global economic recovery from 2000 to 2003. In the case of Quest Communication, ignorance and lack of internal control in safeguarding the assets mislead the managers into such activities. At the juncture of peak dot com boom, Quest Communication suffers weak working capital and in series of troubled bad debts. Based on the situation to save the company from bankruptcy, the managers decide to deviate from the basic rule and going against the principle of prudence by inflating their net worth to generate higher income and to stay competitive in the market. [1]

Earning Management
Large corporations adopt Earning Management method which involves managers in safeguarding the economic performance and structuring the company portfolio to gain confidence of investors. This method at certain condition, position the company’s credibility and performance in within its capability. An example was the disclosures of key ratio in large corporation such as Singapore Airlines in its annual report by lowering its key asset value to increase its profitability and to gain the trust of their stockholders and stakeholders.
Adjustments are made in within the loopholes of the financial accounting to produce a non-realistic financial statement with intention to project a desired outcome of satisfactory financial health status. Such behaviors are drawn by fundamental intentions in effect towards the financial statements.

Market Expectations
While maintaining the industry expectations, managers play a critical role in conforming towards the principle of full disclosure and materiality in the disclosure of company’s financial health status. In the desire to achieve a higher market expectation, negligence and personal integrity are ignored especially at critical times such as credit crunch and economic downturn arouses managers in preventing corporate debts turning into toxic assets.
The introduction of hedge funds and stock options as compensation packages are examples of creative accounting that enable large corporations to generate higher net worth in the Return of Investment. On surface, it may look as though it increase the net worth of the corporation but in contrary, such compensation packages that are offered are used as a stepping stone to bailout unhealthy financial statements. [2]

Personal Realization Bonus
Inflating profits in financial statements and annual reports are some critical examples of creative accounting. It is conducted intentionally to fraud the asset of the organization in personal favor. Such incident could be seen largely in the recent global financial crisis where familiar faces such as Bernard Madoff and Stanley O’Neil are on the top list in creating personal wealth through laundering asset of through their responsibilities in the organization. This shows that principle of sincerity is not practice in reporting the reality of the financial status of the company.

Maintenance in Position within the Market
Principle of prudence aims to show the reality of one firm should paint a pretty picture in comparison to its actual fact. While top management decides on such activities due to business downturn and yet trying its best in gaining the confidence and trust from the stakeholder to maintain its position in the marketplace. One example quotable situation is from the WorldCom incident. While in the downturn, the finance department painted a false picture on its financial status and its profitability with an intention to increase the stock prices of WorldCom. The accountability and the individual negligence of act places the company in jeopardy towards its list of stockholders and stakeholders.

Conclusion
Principle of accounting dated back to tradition where with an objective of providing financial statement and maintaining a healthy financial status throughout its business development is crucial to stay vigilant and prudence in the marketplace. Financial controllers are bind within the principal of regularity which is defined to the conformity of law and regulations. Creative accounting and earning management is not encouraged even when crisis happens.

[1] Quest Communication, United States of America 2002 in reference from http://www.businessonline.com
[2] Hedge Funds and stock options in reference from publication of Bloomberg Market, March 2009