Aggressive accounting

The accounting aggressive is a method of accounting whereby the accounting figures are manipulated at the convenience of the company .

This aggressive accounting is carried out intentionally and deliberately by the accounting department with the intention of giving a more favorable image of the company. It is also known as creative accounting.

Companies that have aggressive accounting policies often follow criteria for recognizing questionable expenses and income.

Given the accounting complexity of some business conglomerates and the flexibility that accounting principles often allow, this type of practice is very difficult to detect even for people closest to the sector.

Methods used by aggressive accounting

There are many ways to make up the accounts of a company. One of the most used in creative accounting is the manipulation of the structure of income flows so that they are recognized at the most favorable time for them.

Imagine that you are the new president of a company, if you attribute less income and more expenses to the first year (exchanging them the following year) you can say that you were doing a clean of the company the first year. While the following year, there will be greater amount of income and less amount of expenses, which will give the feeling that you have increased the profit of the company, but without having done more than an accounting game. Therefore, in accounting, the rules are usually very strict with the accrual principle .

Another common practice of aggressive accounting is related to the value of the company’s own funds. Company executives can artificially inflate the value of  trading of the shares to subsequently dispose of their shareholdings at higher prices than they should really take market. This artificially inflated value of own resources means a greater value of these and thus more operational capital. By inflating the value of the shares, the company’s own fundsincrease, improving its debt ratios and thus giving a more solid financial image.

Examples of aggressive accounting

There are several cases of companies that went bankrupt because of this type of fraudulent accounting practices. One of the most popular and media cases in the world was the Enron case. The US energy company was accused of fraud in 2002 when it was discovered that much of its benefits were false and that its debt was considerably greater than previously believed.

After cases such as Enron and other companies with aggressive accounting practices, good corporate governance of the company has gained a special role in making investment decisions. This is vital to implement codes of good practice in addition to control mechanisms to detect and prevent this type of accounting fraud.

by Abdullah Sam
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