Crossing the Line: Creative Accounting or Fraud

Financially-sound companies can more easily obtain lines of credit at low interest rates, as well as more easily issue debt financing or issue bonds on better terms.

Companies often take advantage of loopholes to present themselves as more profitable than they are. Most do it in a way that they’re not technically breaking the law, but ethics certainly come into question. When should you be concerned and when is the line crossed between creative accounting and fraud? Rakis Christoforou examines this subjective dilemma in an overview published in the FinancialMirror. In a short but valuable look at the subject of creative accounting, Christoforou shines a light on why corporations use such tactics and where the financial gymnastics are most likely to be spotted.

Why do companies use Creative Accounting? 
There are many reasons why companies use creative accounting to manipulate their balance sheets. Most of the times they want to create the appearance to shareholders, investors, bankers, customers, suppliers and other third parties that companies’ financial standing is sound. Other times, management may be seeking to increase profitability due to pressures from the board or to receive unearned bonuses. Also, financially-sound companies can more easily obtain lines of credit at low interest rates, as well as more easily issue debt financing or issue bonds on better terms.