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Creative accounting is a practice whereby a company takes advantage of loopholes to show that they are more profitable or financially stable than they actually are. In many cases of creative accounting, the company is not yet breaking the law, but is most likely engaging in unethical behavior. Creative accounting can lead to suspicion, audits by the government, and, in the case of fraud, the dissolution of a company. Some creative accounting is simply done in error when an accounting system is not set up for checks and balances. This article will tell you how to prevent creative accounting.



  1. 1
    Make sure your company is run under one bookkeeping system and one accounting system. Large companies often unintentionally promote creativity or error if every clerk, bookkeeper, or office manager is left to run their system as they see fit. In the case of a governmental audit, this can be difficult or devastating for a company to find themselves unable to make a good case that the accounting books are solid.
    • One way to avoid this is to adopt a new and more efficient accounting program. Hire a head accountant to train everyone and to check that everyone follows the new practices to the letter.
  2. 2
    Hire an internal auditor. Although this may sound unintuitive to audit yourself, it is preferable to check up on your own business transactions before the federal or state governments decide to audit you. It can also help your company to reduce waste, change to a more efficient system and reorganize.
    • Many professional auditors work in this capacity. Also, many Certified Public Accountants (CPA) work in this capacity in the months after taxes are traditionally submitted.
  3. 3
    Make sure your accountants, clerks and bookkeepers take a certain amount of ethics courses each year. While CPAs are required to take these credits, you should consider enrolling anyone who is involved with your finances from a clerk to the Chief Financial Officer (CFO).
    • In the case of the largest scandals, such as Enron, the downfall was considered due to creative accounting. CFOs and other managers hid the debt of the company to inflate the stock price. These cases are now taught in ethics courses, so they can be analyzed, and, ideally, never repeated.
  4. 4
    Control some main factors of how the company is run to reduce your creative accounting risks. According to Charles Mulford in "The Financial Numbers Game," the following company traits put you at risk for creative accounting:
    • Weak internal control creates a situation where you have many people processing numbers in different ways. If your accountants have few checks and balances, and they cannot explain the profits, margins and debts in simple English, you are at risk.
    • Familial relationships amongst the leaders of the company and the board of directors puts a company at risk for creative accounting. People are more likely to put family first and try to find loopholes to protect their family unit. Try to diversify the board of directors with experienced financial leaders, or create an easy reporting system where internal auditors can catch these mistakes before it is too late.
    • Boards of directors with little experience in finance are more likely to promote creative accounting. People in charge of finances should know the law, ethics and accounting procedures if they have any stake in how the accounting books are being made.
    • If the assets and revenues are less than $100 million, there is a rise in creative accounting. Perhaps this is because the stakes are higher. Be aware if you are part of an accounting department in a company like this.
  5. 5
    Create an internal checklist. These are the checks and balances that will make a company's books honest and scrupulous in the eyes of the Internal Revenue Service (IRS), the Securities and Exchange Commission (SEC) or any other outside agency.
    • An internal checklist should start with monthly reports that follow the accounting system. It should include regular internal audits. It should also create a way in which whistle blowers on creative accounting will not lose their job.
  6. 6
    Make sure your marketing campaign is online with ethical accounting practices. Marketing announcements should never inflate the value of stocks, or give an idea that a company is highly profitable, if it is not. Although this is not directly creative accounting, this is often where it crosses the legal line.



  • If you are a non-profit company, avoiding creative accounting is even more important. Many companies are dissolved for this reason. Although it is important to remain positive, make sure never to hide your losses or allow money to be unaccounted for. Non-profit fraud is extremely severely punished by the IRS and other governmental organizations. Make sure your company understands what is ethical in fundraising, advertising and asking for donations.

Things You'll Need

  • Uniform accounting system
  • Internal audits
  • Internal checklist
  • Ethics classics
  • Experienced financial leaders and board of directors

Article Info

Categories: Accounting and Regulations

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