Techniques and Methods

There are several techniques for the application of creative accounting, it is the same situation that arises if you want to pay a few taxes within the legality. Therefore, a company that wants to modify its results will seek in the accounting regulations those parts that are not regulated, have an alternative treatment or are issues in which they can be optimistic or pessimistic when making a future forecast. Make-ups are also made when valuing inventories and how to reflect provisions; In the form of accounting for debts, exchange differences, off-balance sheet transactions, obligations or contingencies.

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Other companies opt for creative accounting in consolidation processes; In the reclassification of assets and liabilities and in the evaluation of profit and loss, including expenses charged to reserves or in the estimation of income and expenses, among others.

Lastly, the make-up of the figures is also used when preparing annual reports of companies, management reports and audit reports. In those countries where scandals have occurred due to the practice of creative accounting, they have highlighted the most used techniques of creative accounting.

The following is a summary of these techniques:

• Sometimes existing regulations allow you to choose between different accounting methods for recording accounting transactions. For example, in some European countries, a company can choose between a policy of remediation of development costs at the same time as they occur or amortize them over the life of the project in question. The company can choose the accounting policy that projects the preferred image.
• Some accounting records involve a lot of estimates, opinions and predictions. In certain cases, such as estimating the useful life of fixed assets to calculate their depreciation, it is normal for these estimates to be made internally in the company and the creative accountant has the opportunity or possibility to be more or less cautious or optimistic in the estimate.
• You can record artificial transactions, both to manipulate the amounts in the balance sheets, and to shift profits between accounting periods. This is achieved by registering two or more transactions related to a third party, usually a bank. It is assumed that the sale of an asset to a bank is arranged and then leased for the rest of its useful life (known as lease-back). The sale price of this operation may be above or below the present value of the asset, because the difference can be offset by higher or lower leasing fees.
• In some cases accounting criteria can be changed from one year to another. The principle of uniformity or consistency establishes that it is not possible to modify the accounting criteria of accounting from one year to another, except in exceptional cases that will be identified and justified in the report or accounting report.
• "Tackle the channels" of finished product or raw material. That is, persuade the customer to accept the product even if they do not need it and store it. Thus, even if the sale is made on credit and the seller is committed to financing the redundant inventories, profits are inflated. A variant of this practice is to rent warehouses to store the product purchased by companies that are fictitious subsidiaries.
• Sell ​​assets and not report them as extraordinary income but bring them to operating income. With this practice, in addition, it gives the impression that reduces the administrative cost of the company with what seems to increase its efficiency.
• Raise the profits with the capital gains registered by the pension funds of the workers of the companies, administered by them.
• Invent subsidiaries ("purpose-specific entities") to hide debt and generate unrealistic profits.
• To make exchanges of raw material or finished product of similar characteristics with competing companies, taking to profits immediately the product of the sold and amortizing the acquired thing in much larger terms.

It is obvious that all this disorder has revealed flaws in the regulatory and supervisory areas that supposedly prevent bad practices and has made all kinds of recommendations by government agencies to bureaucratize it even more, instead of making it more agile and efficient .