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Exploring the influences and constraints on creative accounting in the United Kingdom

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  • Atul Shah

Abstract

Allegations of creative accounting by management of listed corporations in the UK do not abate. To the extent that these practices distort the underlying reported financial performance of firms, they conflict with the basic aims of accounting regulation - to provide consistent and comparable financial information to users. Studies have shown that accounting choices are influenced by a range of contracting, financing and operational factors. However, we still know little about what constraints exist against the practice of creative accounting and how effective these are. Issues such as the extent to which the press and analysts are successful in restraining creative accounting, and the role the 'true and fair view' principle and auditors play in the prevention of such practices still remain unresolved. This article explores these themes by examining the accounting practices of two UK companies which issued a creative financing instrument. Using a combination of interview, documentary, and financial statement information, the analysis shows that management took advantage of gaps in accounting standards to present a biased picture of financial performance. Auditors did not appear to restrain such practices, and the true and fair view principle, rather than unifying accounting practice, appears to tolerate a range of interpretations. Adverse media publicity appears to be a successful deterrent in the medium term, but since the press are not regulators, their reporting is not necessarily consistent or predictable. UK analysts at the time did not evaluate accounting practices in any significant detail, and thus this potential restraint was not effective. Overall, the influences and constraints on creative accounting are illuminated in this study in a way which provides new insights into our understanding of financial reporting.

Suggested Citation

  • Atul Shah, 1998. "Exploring the influences and constraints on creative accounting in the United Kingdom," European Accounting Review, Taylor & Francis Journals, vol. 7(1), pages 83-104.
    • Handle: RePEc:taf:euract:v:7:y:1998:i:1:p:83-104
    DOI: 10.1080/096381898336592
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    References listed on IDEAS

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    1. Shah, Atul K., 1996. "Creative compliance in financial reporting," Accounting, Organizations and Society, Elsevier, vol. 21(1), pages 23-39, January.
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    1. Emilia VASILE & Ion CROITORU, 2020. "Financial Statements €“ Object Of The Financial Audit," Internal Auditing and Risk Management, Athenaeum University of Bucharest, vol. 60(4), pages 51-58, December.
    2. Philippe Touron, 2002. "Theorie Institutionnelle Et Adoption De Normes Comptables Internationalement Reconnues : Etude De Trois Cas Français Sur La Periode 1989 - 1993," Post-Print halshs-00584540, HAL.
    3. Beattie, Vivien, 2005. "Moving the financial accounting research front forward: the UK contribution," The British Accounting Review, Elsevier, vol. 37(1), pages 85-114.
    4. Ciocan, Claudia Catalina, 2018. "Creative Accounting And Fraud: A Comparative Approach," Management Strategies Journal, Constantin Brancoveanu University, vol. 42(4), pages 157-163.
    5. Tettet Fitrijanti, 2018. "The Influence of Islamic Governance on Minimizing Non-Compliance with Sharia," GATR Journals afr159, Global Academy of Training and Research (GATR) Enterprise.
    6. Ciocan Claudia-Cătălina, 2017. "True and Fair View: Incentive or Inhibitor for Creative Accounting?," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 451-455, June.
    7. Anja Hjelström & Walter Schuster, 2011. "Standards, Management Incentives and Accounting Practice -- Lessons from the IFRS Transition in Sweden," Accounting in Europe, Taylor & Francis Journals, vol. 8(1), pages 69-88, June.
    8. Hronsky, Jane J. F. & Houghton, Keith A., 2001. "The meaning of a defined accounting concept: regulatory changes and the effect on auditor decision making," Accounting, Organizations and Society, Elsevier, vol. 26(2), pages 123-139, March.
    9. Panagiotis E. Dimitropoulos & Dimitrios Asteriou, 2009. "The value relevance of financial statements and their impact on stock prices: Evidence from Greece," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(3), pages 248-265, March.
    10. Claudia Catalina CIOCAN & Iuliana GEORGESCU & Mihai CARP, 2020. "The Perception of the Representatives of the Accounting Profession from Romania on the Relationship Between Conservatism and True and Fair View," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 18(159), pages 585-585.
    11. K. Peasnell & P. Pope & S. Young, 2001. "The characteristics of firms subject to adverse rulings by the Financial Reporting Review Panel," Accounting and Business Research, Taylor & Francis Journals, vol. 31(4), pages 291-311.

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