It is mentioned by Horngren, Harrison, Bamber, Best, Fraser and Willet (2004, p495) in the textbook of accounting that financial statements should provide accurate information that can be used by interested parties to assess the performance of managers and to make economic decisions. Users may assume that the financial information they receive is reliable and fit for its purpose. Accounting regulation attempts to ensure that information is produced on consistent basis in accordance with a set of rules that make it reliable for users. However, communications between entities and shareholders may be distorted by the activities of financial statement makers who wish to alter the content of the messages being transmitted. This type of distortion is often referred to 'creative accounting'. It is best defined by Merchant and Rockness (1994) as "any action on the part of management which affects reported income and which provides no true economic advantage to the organization and may, in fact, in the long-term, be detrimental." While opinions on the acceptability of accounting manipulation vary, it is often perceived as reprehensible. This essay will present the possible motivations for companies to manipulate accounting numbers and engage in creative accounting and gives some solutions to how such unethical practices might be minimized.
             There are several motivations for companies to engage in creative accounting. As can be seen from the case of Enron, which was one of the largest companies in the US, formed in 1985, one of the main reasons for creative accounting is to conceal losses and maintain the business. Enron' s business was running well during 1990s, but finally, it declared bankruptcy in December 2001 due to creative accounting practice. (ABC News. COM, 2002) Investors surprised about what exactly caused the sudden collapse of one of the largest company in the country. After investigation, it was found th...