Worldcom Creative Accounting

Creative accounting refers to accounting practices that seem to follow the letter of the applicable accounting standards but deviate from the spirit of those standards. It is the use of accounting methods to hide aspects of a company's financial dealings in order to make the company appear more or less successful than it is in reality. In other words, Creative accounting is the transformation of financial accounting figures from what they actually are to what preparers desire by taking advantage of the existing rules and/or ignoring some or all of them. The motivation to indulge in these practices is anticipation of rewards which may include higher share prices, improved credit rating resulting in lower borrowing costs, higher incentive compensation for executive management etc. Some of the creative accounting schemes perpetrated by companies include improper revenue and expense recognition, faulty accounting in connection with business combinations, and wrongful use of off- balance-sheet arrangements. . Listed companies engage in creative accounting practices include the usual smooth earnings, balance-sheet financing, abuse of mergers and acquisitions accounting, any changes to accrual method of manipulating the consolidated financial statements, asset replacement and so on. These fraudulent schemes can be devastating to users like shareholders, lenders, employees, board of directors and other stakeholders.
The conflicts of interest among different interest groups represent the real causes of creative accounting. The managers are interested in paying fewer taxes and dividends, the shareholders in gaining higher dividends, the employees in obtaining better salary and higher profit share, the authorities in collecting more taxes. It can be easily seen that the interests are tremendous divergent and creative accounting is deepening it. But creative accounting puts one group or two to advantageous position at the expense of others. Sometimes for investors taking a