'In the business world, the rearview mirror is always clearer than the windshield.'
- Warren Buffett
Delayed payments by some largest clients made a business suffer a cash flow crisis. To make matters worse, the costs were rising, and the turnover was shrinking. Worryingly, it was feared that due to all these challenges, the business would not have sufficient money to report splendid performance. This resulted in inefficient accounting practices, thus, depicting an inappropriate picture of business earnings. Such corporate earnings restatements have seen tremendous growth in the past decade. A milestone case in fraudulent financial reporting occurred in 2009 at Satyam Computer Services, the IT giant. The fraud raised grave concerns on the auditing firm, which in the case was completely blind to the ongoing fraudulent activities. The fraud went over for many years through forged bank balance certificates, sales invoices and many others. This enabled Satyam to collectively overstate its revenues and assets by billions of dollars, incredible amounts for the time.
Dynamic economic environment and ever-increasing competition among businesses have led business managers to present their business in the best possible light. However, rising costs, shrinking turnovers and delayed payments by large clients have made businesses suffer cash flow crisis in the recent past. Obviously, these challenges have shattered the businesses’ dreams of reporting impressive performance. This has ultimately forced businesses to indulge in inefficient accounting processes, thus, depicting an inappropriate picture of business earnings. As a result, corporate earnings misstatement has seen tremendous growth in the past decade. Business performance may not always be attractive. There is tremendous pressure and personal incentive for business managers to use unfair business practices to keep pace with peers. As a result, the nightmare of risky accounting is on the increase. This has led to creative accounting practices gaining popularity over the years.
Creative accounting may involve the use of any or all such steps with the motive of depicting a business position that is different from the real position. Modifications in accounting standards over time have been done to reduce financial manipulations. However, these well-intended changes may result in an opportunity for accounting manipulations. Though creative accounting has a positive impact on the short term financial performance of a business, its long term consequences include decreased stock prices and even insolvency. Being a root of numerous financial scandals, creative accounting has resulted in making forensic accounting a much sought after profession of the present times as well as the future.