CREATIVE ACCOUNTING PRACTICES AND THEIR ROLE IN COMPANY FAILURES

Abstract

Background and Objective: Creative accounting refers to the manipulation of accounting standards and practices in ways that remain technically legal but distort the true financial position of a firm. While such practices may temporarily enhance a company’s financial image, they often erode transparency, mislead investors, and increase systemic risks.

Study Design/Materials and Methods: This paper examines the nature of creative accounting, its advantages and disadvantages, and its role in major corporate scandals, including Enron, Parmalat, Satyam, Toshiba, Lehman Brothers, and others. Through a qualitative case study approach, the research explores the mechanisms by which creative accounting evolves into fraud and corporate collapse.

Results: The case study analysis revealed that despite short-term benefits of creative accounting, it contributes to large bankruptcies and destabilises financial markets.

Practical implications: The findings suggest that while creative accounting provides short-term benefits such as increased valuations and capital inflows, it ultimately undermines corporate credibility, contributes to large-scale bankruptcies, and destabilises financial markets.

Conclusion and summary: The paper concludes by highlighting preventive measures, including stricter auditing practices, enhanced corporate governance, whistleblower protection, and forensic accounting techniques.