Aggressive accounting involves misstatements on balance sheets to make a company appear financially stable. It can inflate financial markets and hurt investors. Regulators attempt to regulate accounting practices to make it more difficult to engage in creative accounting.
Aggressive accounting is a business practice in which certain misstatements are made on balance sheets and in financial disclosures with the goal of making a company appear financially stable. Some of the tactics used in this type of accounting are explicitly illegal, while others skirt the line of legality, are legal in the technical sense but definitely do not adhere to the spirit of traditional accounting practices. Also known as “creative” or “innovative” accounting, aggressive accounting has been a problem for centuries, but became particularly problematic in the 20th century, when it contributed to a series of financial scandals.
The goal of accounting is to create a complete picture of a company’s finances and to keep track of those finances effectively and honestly. However, there are various ways to manipulate accounting figures to cover financial problems or to artificially inflate the value of a company. The practice of aggressive accounting, also known as “cooking the books,” involves some machinations to present a desirable financial picture.
There are several objectives behind aggressive accounting. One is to inflate the value of a company’s shares, thereby generating more operating capital. Businesses can justify using this type of accounting on the grounds that it creates more capital, allowing it to expand and become stronger, and that the accounting is simply optimistic, rather than an outright lie. It is also used to calm shareholders, and can be used specifically to defraud individuals, in the case of a company driving up stock prices with aggressive accounting before allowing selected individuals to quietly sell their shares.
It can be hard to spot aggressive accounting. Shareholders typically receive annual or periodic statements about a company’s income, expenses, and overall performance, but they don’t have access to the company’s books, which can reveal interesting information when audited. Financial regulators may also be limited in the number of audits they can perform, meaning that creative accounting can only be identified when a whistleblower comes forward.
This practice is considered harmful because it can inflate financial markets and expose them to the risk of collapse. It also hurts people who may fall victim when they invest in companies with aggressive accounting practices, and it can hurt entire industries as well. Various nations attempt to regulate accounting practices to make it more difficult to engage in creative accounting, and the penalties for cooking the books can include fines and prison terms for those involved.
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