Most Common Transactions

Analysts and researchers have compiled a collection of the most common transactions that can be found recorded in company books handled using the criteria of creative accounting.

Some of these transactions are:

• Increase or reduction of expenses: Accounting rules provide a margin of maneuver in relation to the quantification of certain expenses or income, such as depreciation, depreciation or the activation of certain expenses, such as, for example, Research and development costs.
• Increase or reduction of income: In some cases the recognition of income may be delayed, by virtue of principles such as prudence or correlation of income and expenditure.
• Increase or decrease of assets: Inventories can be valued according to different methods (FIFO, LIFO Weighted Average among others) so that the total amount may differ with the corresponding effects on the costs of sales and the result. These changes will affect the ratio of current assets to short-term liabilities, directly influencing the liquidity ratio.
• Increase or reduction of reversals: Changes in income or expenses, as discussed above, affect profits or losses and therefore reserves. In this way, the ratio between debt and equity is altered with corresponding effects on indicators such as debt or financial leverage.
• Increase or reduction of debts: In relation to certain items, accounting regulations allow the choice between several possibilities. For example, in Europe for pension funds there is the possibility of regularizing existing debt in a period that oscillates, for most companies between 7 and 15 years. Therefore, if a company is interested in increasing its profit, for example, it will delay as long as the full regularization of the existing pension plan debt is allowed. This practice also modifies the analysis of financial indices of indebtedness, financial independence or liquidity.
• Reclassification of assets or liabilities: In other cases, there may be some margin in determining whether a concept is included in one item or another. By way of example, one can cite the case of certain elements that can be counted in the fixed asset or in the inventory. This possibility can affect the relationships between the various items and, therefore, the indices that allow to evaluate aspects such as liquidity, inventory rotation, working capital, among others.
• Information included in the report, in the management report and in the audit report: There are sections or bodies in the reports and the management report in which more or less information can be included. This can lead to changes in the opinion that emanates from them. As for the audit report, in some cases the qualifications or opinions may be expressed in such a way that a certain interpretation of them is sought.
• Presentation of information: another possibility for creative accounting is provided by the criteria used for the presentation of information, which according to the makeup used can form an opinion contrary to reality or according to the interests of the company.