The paper 'The Tendency to Adopting Creative Accounting' is a perfect example of a financial and accounting assignment. Fairly noted, it is argued that companies do not consider the significance of adopting a creative form of accounting in the course of normal operations of the firm rather than when they face immense levels of challenges. Thus, the move to assume the accounting practices of these firms is evident. In itself, creative accounting allows for accounting professionals to adopt accounting methodologies which are conversant with the results desired by preparers. Creative accounting is opportunistic in nature meaning that they are ex-post thus are tailored to expound and predict on certain “ propped-up” manners which are expected to happen in the near future of a company’ s normal operations.
In addition to this, creative accounting is tailored to allow for opportunistic actions to be assumed in the case that there are contractual agreements that were already put in place (Deegan 2010, 125). It is worth noting companies would, thus, not seek the tendency of adopting creative accounting until difficulties are detected given the fact that under the arising difficulties they are forced to adopt accounting methodologies which will catapult their sustainability chances.
In the course of battling with the chances of its survival, hence the going-concern, they adopt different stages of sustainability first hand. In that case, these firms will have to report their financial performance to the different stakeholders concerned. In this manner, their confidence level is assured and the survival of their operations is guaranteed. In times of difficulties, such as the one experienced by the HIH Insurance company in which it is faced with the challenge of misrepresenting its financial reports hence financial performance, companies tend to turn into creative accounting given the fact that the methodology allows for protection of self-interest.
More to say, it is fair to postulate that the self-interest of the different stakeholders within the firm is challenged whenever it is deduced that financial reports have been done in an unethical manner. Thus, managers whose contractual arrangements are determined by such plans as “ the bonus hypothesis plans” embark on opting for accounting methodologies that will transform anticipated future earnings into the present. Notably, the sole objective of any given business is to maximize the wealth of the shareholder while at the same time minimizing losses.
In the course of difficulties, creative accounting is embraced apparently given the fact that it limits compromise levels of shareholder’ s wealth by the unfortunate events. In the course of difficulties, it is assumed that companies are facing the threat of immense levels of losses which is subsequently contrary to the main objective of the firm. Like in the case of HIH Insurance Company, it is evidently clear to note that the management, in conjunction with the board, had agreed to undervalue the true and fair worth of the Company’ s losses in the financial period reports ending 1998 and thus, protecting the existing shareholders from great levels of losses by the public domain. In the course of normal operations, firms operate in the absence of both loyalties and the morality of the different stakeholders.
However, this case is altered in times of difficulties so that the aforementioned two attributes are incorporated in order to avoid possible chaos and loss of operations in that matter (Deegan 2010, 125).
It should be noted that the relationship which exists between the manager and shareholder is that of the principal-agent relationship hence the managers as the agents are expected to be loyal to the owners of the companies irrespective of their involvement in the operations of the firm altogether.
ReferencesDeegan Craig, 2010, Australian Financial Accounting, 6th Ed, McGraw-Hill, Australia