Creative accounting involves the use of unorthodox techniques to adjust the reported profit level or financial position of a business. Managers may engage in creative accounting to increase their bonuses, convince a lender to give the firm a loan, or increase its valuation in the event of a sale. Creative accounting can also be used to reduce reported profit levels, typically to avoid paying taxes. There are many creative accounting techniques, including the following:
- Extending the useful life assumption for an asset in order to reduce the related periodic depreciation charge
- Increasing the assumed salvage value of an asset in order to reduce the related periodic depreciation charge
- Reducing the periodic accrual charge for the bad debt reserve
Creative accounting techniques are generally acceptable under the relevant accounting framework, but operate in a gray area where reported results are definitely being skewed away from actual results.