North International Conference of Economics [607851]

North International Conference of Economics
NICE 2016, September 23 – 24, 2016, Baia Mare, Romania
Department of Economics and Physics, Technical University of Cluj -Napoca, Romania

INFLUENCING THE PERFORMANCE AND FINANCIAL POSITION AS REPORTED IN
THE ANNUAL FINANCIAL STATEMENTS USING CREATIVE METHODS

Daniela GEORGESCU1
Dorel MATE Ș2

ABSTRACT
The accounting is a technique designed to collecting, processing, and interpreting the information
about the economic flows. Being in the service of the users, accounting has to be neutral to respond
objectively to all the parts interested in its functioni ng and the society’s results. In an international
principle, the balance sheet is the summary document which presents the financial statement and its
evolution. It permits the formulation of value judgments regarding the efficiency and the risks
afferent t o an enterprise, as well as the assessment of future cash movements. The economic theory
considers that the goal of the societies is maximization of profit. However, there are enterprises
which aim to realize an acceptable profit using different accounting methods. The creative
accounting is an exciting problem, which requires a vigorous solution. The normalization process
has a huge influence on the development of the creative accounting as it is characterized by a
multitude of o ptions and references. As a result, the accounting harmonization becomes an
important base for limiting the phenomenon of creative accounting . The role of the setters and
accounting professionals is not simple , as it will be showed in the present article.

KEYWORDS: Financial statements ; Creative accounting; Balance sheet.

JEL CLASSIFICATION : F3, M4

1. INTRODUCTION

In an international principle, the balance sheet is the summary document which presents the
financial statement and its evolution. It permits the formulation of value judgments regarding the
efficiency and the risks afferent to an enterprise, as well as the assessment of future cash
movements.
As a consequence, the enterprises are tempted to aim at improving the balance sheet format and
adjusting the profit and loss account. The latter investigates all the operations that contributed to the
final result, either the profit or the loss.
The economic theory considers that the goal of the societies is maximization of profit. However,
there a re enterprises which aim to realize an acceptable profit. The accounting methods permit to
the businesses to present, in some limits, results that are consistent with their objectives rather than
with reality.

1 West University of Timisoara , Romania , [anonimizat]
2 West University of Timisoara, Romania, [anonimizat]

North International Conference of Economics
NICE 2016, September 23 – 24, 2016, Baia Mare, Romania
Department of Economics and Physics, Technical University of Cluj -Napoca, Romania

2. CREATIVE METHODS OF MODELING THE FINANC IAL PERFORMANCE

Some of these methods, called accounting policies, occur from selecting between different
accounting methods. They aim at straightening the current and net result or at transforming the
structure of the result without changing the net one.
Other methods, called management decisions, do not express a simple action of accounting records.
They register operations, realized by the enterprises, which have as a consequence the optimization of
the current and net result.
One of the creative method s of manipulating the financial performance is linked to the usage of
accounting policies. These procedures contain the possibilities of the managers regarding the
accounting arguments. They refer to:
– Clarifying the capacity and level of aggregation of the information published in the
summary documents, generally, and in the annexes, especially;
– Establishing the information published in the management report;
– Setting the period of making the financial information known;
– Editing, of oneself, some optional synthesis papers;
– Removing certain accounting principles.
The objectives of the accounting policies differ from one society to another. So, a society that appeals
to the public saving, gives importance to the financial consequences of the decisions, while a small or
medium organization often favors the tax optimization. As a result, the accounting policies could aim
at:
– diminishing the published losses;
– reducing the taxable benefits;
– increasing or decreasing the current result;
– growing or declining the dist ributions;
– temporary easing the accounting results to reduce the risk remarked by the financial
environment.
The management decisions have as a main finality presenting a different image of the result, although,
in essence, they do not modify the situation of the society. So, the accounting result represents a very
elastic concept. Its elasticity is linked to the time and space dimensions.
Through time, the elasticity comes from the reasoning present/ future. Also, it derives from
emphasizing the potential in using the ideas in order to specialize the exercises and connections
between the expenses and incomes.
a. Linking the current expenses to cashing in perspective. The production in progress, the long –
term contracts, and the capitalized expenses create diff iculties in the inventory evaluation.
Moreover, they bring forward the problem of existence of future income streams and the
recovery period of the capitalized expenses.
b. Binding the expenditures in perspective to the current collections. The principle of
prudence obliges the managers to identify the facts generating future expenses which have
their origin in the actual exercise, and to constitute provisions. However, the latter could
have different effects on the results.
c. Including the future incomes in th e result of the exercise. The best -known examples of
realizing latent profits to bring the result of the exercise to the desired level are the sales
followed by redemption and the sales of ol d buildings.
Regarding the elasticity in space, it clears from tr ansactions “half true, half false” and from the
classification of operations. It can be observed that the classical techniques of straightening are
rounded, more and more, by a real administration of the result. Although this administration is
based on the action over some accounting principles, some authors consider that there are no
“background incomparabilities between the fundamental accounting principles and the creative

North International Conference of Economics
NICE 2016, September 23 – 24, 2016, Baia Mare, Romania
Department of Economics and Physics, Technical University of Cluj -Napoca, Romania

accounting, if the latter is used discerning, in a field of application clearly de limited, and in the
conditions that respect the spirit in which this notion appeared.”
The depreciation policy influences the evolution of the result. The parameters through which the
influence is exercised, are the period and method of amortization. Theor etically, in the virtue of the
methods’ consistency principle, the societies can influence the result through the amortization
policy but only in the year in which an investment is made.
Another policy with impact over the result refers to the provision. T he provisions are designated to
the coatings risks, expenses or losses whose object is determined precisely, but whose realization
and size are uncertain. Requiring assessments, the provisions describe conditions for polishing the
results. So, increasing t he provisions in the strong years, diminishes the effect, while reducing the
provisions in the poor years, improves the result.
Another case targets the small and medium enterprises which are characterized by a reduced
number of employees. Most of the time s, the owner -manager is the only employee. The situation
seems to advantage the manager, because the lack of wage costs influences, upwards, the
accounting result and, implicit, the size of dividends.

3. MODELING THE FINANCIAL PERFORMANCE – CREATIVE METHO DS

Most of the methods of grooming the performance can be seen at the level of big companies, listed on
stock exchange. The motives of the managers to manipulate the accounts can be diverse:
– Smoothing the incomes. Generally, the companies prefer to report a constant tendency of
growth of the profit, than to show volatile earnings, marked by a series of dramatic
increases and decreases. It can be obtained by constituting big reserves in the good
years, so that the provisions would be reduced in the poor yea rs, improving the profits of
the companies.
– Manipulating the profit to correspond to the forecasts, which is a version of smoothing
the incomes.
– The managers can apply the accounting policy to increase the income, in order to
distract the attention from t he unwanted news regarding the company.
– The creative accounting can maintain or improve the price of the actions.
– The managers can use the creative accounting to delay the distribution of the
information to the market, having the opportunity to benefit by internal knowing.
Another ensemble of reasons for the enforcement of creative accounting in the distortion of
performance appears due to the fact that the enterprises are the cause of the diverse forms of
contractual rights, obligations, and constraints b ased on the repo rted amounts in the financial
statements .
At an international level, in some industrial sectors, such as electricity and telephony, the utility
companies are under the authority of a governmental organism which establishes the maximum
amoun ts that can be spent. If these companies report big profits, then the organism will proceed to
decrease the prices. So, the companies are interested in choosing the accounting methods that seem
to reduce their reported profits.
Also, the plan of awards for the manager can be restrained by the level of profit or the price of a
share of the company. If it is linked to the price of a share, then it is clear that the managers will be
justified to make known the financial statements that will impress the stock m arket. If the bonuses
are connected to the level of reported profit, then the plan provides that the award is a percent of the
profit over a minimum level, and it is paid up to a maximum level.
– If the profit is located between the two limits, the man agers will put into practice the accounting
methods that will conduct the profit to the maximum limit.

North International Conference of Economics
NICE 2016, September 23 – 24, 2016, Baia Mare, Romania
Department of Economics and Physics, Technical University of Cluj -Napoca, Romania

– If the profit is located under the minimum limit, the managers will use the accounting methods
that will maximize the provisions so that, in the ne xt years, the reserves would be considered
incomes and improve the profit.
– If the profit is located over the maximum limit, the managers will aim to diminish the profit to
the limit so that, in the next years, the profit would be increased.
In the dev eloping countries, but not only, the fiscality is, also, a condition in the creative
accounting, in the situations in which the taxable profit is assessed based on the accounting
numbers.
The management’s modification of the big companies entails the motiv ation of the new
management team to constitute provisions that ensure that any loss appears as a responsibility of the
previous leadership.
The techniques above target the modeling of the profit and loss account, but they also action over
some elements, s uch as the equity, duty, need for working capital, treasury, and financial position.
In the virtue of the prudence principle, the assets must be valued at the historical cost. The strict
enforcement of the historical cost principle can affect though the im age of the financial situation of
a society. So, in some countries, the accounting standard setters authorize, in certain conditions, the
reevaluation of tangible assets. Using a series of financial fittings, the enterprises can transform
some debts in equ ities. The idea consists of the issue of titles which present the particularity that is
redeemable only at the time of the society’s liquidation. The particularity makes them assimilable to
the equities.
As a result, on the balance sheet, there is a transf er of the less liquid assets (stocks) to the assets
with high liquidity (claims). Regarding the debts that could result from returning the goods, these
are not presented in the balance sheet, but will be, in the best case, the object of registration in the
order and record accounts.
To obtain funding sources, the enterprises can action on the sales of stocks. The universality of
operating consists of the fact that in the sale contract there is an option of stocks redemption.
Between the date of the sale and the one of the redemption, the selling society uses the result
obtained from the trade as a funding source.
All these operations do not present legal irregularities. The problems appear only in connection with
their accounting translation, which reveals t hat, in the last years, the international accounting,
generally, and the Romanian one, particularly, lost a part of its attitude to replicate the sirens of the
commercial city. If it does not want to lose its soul forever, it has to retain those criteria t hat allow it
to find a fair balance between the civic city and the commercial one. The ball is, therefore, in the
field of the accounting professionals.
So, the president of the Institute of Chartered Accountants in England and Wales (ICAEW) drew
attention to “the serious problems of window dressing the balance sheet and off -balance sheet
financing. ”
A year later, ICAEW issued a technical norm which targeted the creative accounting. According to
the norm, the choice of the suitable accounting treatment of a n operation is based on its economic
substance. However, there should be mentioned that, for portraying an accurate image of the
enterprise’s financial statements , is necessary the provision of information regarding the legal form
of the transaction.
Moreo ver, the creative accounting concerned the accounting profession and the normalizing court
of the United States of America. So, Bullen affirmed that “limiting the creative accounting is one of
the most complex projects of the normalizing American body. ”
Also, Wild drew attention to the fact that, because the creative accounting can deceive the users of
financial information, its usage raises questions over the objectives of the summary documents.

North International Conference of Economics
NICE 2016, September 23 – 24, 2016, Baia Mare, Romania
Department of Economics and Physics, Technical University of Cluj -Napoca, Romania

4. THE FIGHT AGAINST THE CREATIVE ACCOUNTING

The accounting is a technique designed to collecting, processing, and interpreting the information
about the economic flows. Being in the service of the users, accounting has to be neutral to respond
objectively to all the parts interested in its functioning a nd the society’s results. Here are some ways
through which the external users of financial information could avoid the traps of the creative
accounting.
There has to be viewed the annual report through well -established filters, which facilitate the
checkin g on a longer period of time. Using the cash flow information at the expense of those that
show the result is recommended to avoid creativity. It is known the fact that the accounting
techniques accept the arrangement of the accounting result, but do not g enerate liquidities. The
availabilities are more important than the profits because their insufficiency can determine the
collapse of the business.

5. CONCLUSION

So, the creative accounting is an exciting problem, which requires a vigorous solution. It i s obvious
that the normalization process has a huge influence on the development of the creative accounting
as it is characterized by a multitude of options and references. As a result, the accounting
harmonization becomes an important base for limiting th e phenomenon of creative accounting. It
has to be highlighted, though, the fact that the efforts towards the international accounting
harmonization are heading, at least for now, on the multinational societies. It appears that, as long
as many explanation’ s systems coexist, it is indispensable that the societies specify the system that
they used to compose the summary documents.
The international accounting practice proves that every time when a new direction is born, the
enterprises find a way to diminish their impact. According to these facts, Devis affirmed that no
matter how many rules would implement the profession, there would always be some who would
find a way to “beat” the system. In conclusion, the role of the setters and accounting professionals i s
not simple, as imagination must be answered with imagination.

REFERENCES

Griffiths, I. (1986). Creative accounting , London: Sidgwick&Jackson .
Jones, M. ( 2011 ). Creative accounting, Fraud and International Accounting Scandals , London:
John Wiley and Sons Ltd .
Warfield, T., Wild, J., Wild, K. ( 1995 ), Managerial ownership; accounting choices and
informativeness of earnings , Journal of Accounting and Economics .