The History of Creative Accounting

Creative accounting, as it is known in England, or earnings management, as it is known, equally euphemistically, in the United States, is the practice of making a company appear more successful than it actually is.

Origin

The phrase "creative accounting" may have been used for the first time in the 1968 Mel Brooks film "The Producers," but the practice has been in existence for over 500 years. The fundamentals of creative accounting were laid down in the seminal work on accounting, De Arithmetica, written by Italian mathematician Luca Pacioli in 1494.

GAAP

Creative accounting was responsible for the collapse of numerous high-profile companies in the United States in the 1930s and 1940s. Concern over the practice led to the formation of the Generally Accepted Accounting Principles (GAAP), which are still in use today.

Modern Day

As recently as 2001, the spectacular collapse of Enron was attributed to creative accounting. Accountants effectively used the juridical status of transactions on the balance sheet to hide their economic substance.

References

• Business Accounting Basics: A brief accounting history
• Annales Universitatis Apulensis Series Oeconomica: Creative Accounting