Creative accounting is a

euphemism A euphemism ( ) is when an expression that could offend or imply something unpleasant is replaced with one that is agreeable or inoffensive. Some euphemisms are intended to amuse, while others use bland, inoffensive terms for concepts that the u ...

referring to

accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

practices that may follow the letter of the rules of

standard accounting practice Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on t ...

s, but deviate from the spirit of those rules with questionable

accounting ethics Accounting ethics is primarily a field of applied ethics and is part of business ethics and human ethics, the study of moral values and judgments as they apply to accountancy. It is an example of professional ethics. Accounting was introduced b ...

—specifically distorting results in favor of the "preparers", or the firm that hired the accountant. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities, and the intent to influence readers towards the interpretations desired by the authors. The terms "innovative" or "aggressive" are also sometimes used. Another common synonym is "cooking the books". Creative accounting is oftentimes used in tandem with outright financial

fraud In law, fraud is intent (law), intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate Civil law (common law), civil law (e.g., a fraud victim may sue the fraud perpetrato ...

(including

securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information. The term as generally understood refers to systematic misrepresentation of the true

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...

and

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s of corporations or other organizations. "Creative accounting" has been at the root of a number of

accounting scandals Accounting scandals are business scandals that arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex ...

, and many proposals for

accounting reform Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

—usually centering on an updated analysis of

capital Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econom ...

and

factors of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilised amounts of the various inputs determine the quantity of output according to the rela ...

that would correctly reflect how value is added. Newspaper and television journalists have hypothesized that the

stock market downturn of 2002 In 2001, stock prices took a sharp downturn (some say "stock market crash" or " the Internet bubble bursting") in stock markets across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 attac ...

was precipitated by reports of "accounting irregularities" at

Enron Enron Corporation was an American Energy development, energy, Commodity, commodities, and services company based in Houston, Texas. It was led by Kenneth Lay and developed in 1985 via a merger between Houston Natural Gas and InterNorth, both re ...

Worldcom MCI, Inc. (formerly WorldCom and MCI WorldCom) was a telecommunications company. For a time, it was the second-largest long-distance telephone company in the United States, after AT&T. WorldCom grew largely by acquiring other telecommunicatio ...

, and other firms in the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

. According to critic

David Ehrenstein David Ehrenstein (February 18, 1947 – March 12, 2025) was an American critic who focused primarily on gay issues in cinema. Life and career Ehrenstein was born in New York City on February 18, 1947. His father was Jewish with Polish ancestors, ...

, the term "creative accounting" was first used in 1968 in the film ''The Producers'' by

Mel Brooks Melvin James Brooks (né Kaminsky; born June 28, 1926) is an American actor, comedian, filmmaker, and songwriter. With a career spanning over seven decades, he is known as a writer and director of a variety of successful broad farces and parodie ...

, where it is also known as

Hollywood accounting Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or " creative" set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Expenditures can be infl ...

Motivations behind creative accounting

The underlining purpose for creative accounting is to "present business in the best possible light" typically by manipulating recorded profits or costs. Company managers who participate in creative accounting can have a variety of situational motivations for doing so, including: *Market and stockholder expectations of profits *Personal incentives *Bonus-related pay *Benefits from shares and share options *

Job security Job security is the probability that an individual will keep their job; a job with a high level of security is such that a person with the job would have a small chance of losing it. Many factors threaten job security: globalization, outsourcing ...

*Personal satisfaction *Cover-up fraud *Tax management *Management buyouts *Debt covenant *Manager's self-interest *Mergers and acquisitions

Types/examples of creative accounting schemes

Earnings management

Creative accounting can be used to manage earnings. Earnings management occurs when

managers Management (or managing) is the administration of organizations, whether businesses, nonprofit organizations, or a government bodies through business administration, nonprofit management, or the political science sub-field of public administr ...

use judgment in

financial reporting Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

and in structuring transactions to alter financial reports to either mislead some

stakeholder Stakeholder may refer to: *Stakeholder (corporate), a group, corporate, organization, member, or system that affects or can be affected by an organization's actions *Project stakeholder, a person, group, or organization with an interest in a proje ...

s about the underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers.

Hollywood accounting

Practiced by some Hollywood film studios, creative accounting can be used to conceal earnings of a film to distort the profit participation promised to certain participants of the film's earnings. Essentially, participants in the gross revenue of the film stay unaffected but profit participants are presented with a deflated or negative number on profitability, leading to less or no payments to them following a film's success. Famous examples of deceiving

good faith In human interactions, good faith () is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. Some Latin phrases have lost their literal meaning over centuries, but that is not the case with , which i ...

profit participants involve

Darth Vader Darth Vader () is a fictional character in the ''Star Wars'' franchise. He was first introduced in the original film trilogy as the primary antagonist and one of the leaders of the Galactic Empire. He has become one of the most iconic villain ...

actor

David Prowse David Charles Prowse (1 July 1935 – 28 November 2020) was an English actor, bodybuilder, strongman and weightlifter. He portrayed Darth Vader in the original ''Star Wars'' trilogy and a manservant in Stanley Kubrick's 1971 film '' A Clockw ...

(with $729M adjusted gross earnings on ''

Return of the Jedi ''Return of the Jedi'' (also known as ''Star Wars: Episode VI – Return of the Jedi'' is a 1983 American epic space opera film directed by Richard Marquand from a screenplay by Lawrence Kasdan and George Lucas. The sequel to '' The Empire ...

'') and ''

Forrest Gump ''Forrest Gump'' is a 1994 American comedy-drama film directed by Robert Zemeckis. An adaptation of the Forrest Gump (novel), 1986 novel by Winston Groom, the screenplay of the film is written by Eric Roth. It stars Tom Hanks in the title rol ...

'' novel writer Winston Groom (with $661M gross theatrical revenue)—both of whom have been paid $0 on their profit participation due to the films "being in the red".

Tobashi schemes

This form of creative accounting—now considered a criminal offense in Japan, where it originated—involves the sale, swap or other form of temporary trade of a liability of one company with another company within the holding's portfolio, often solely created to conceal losses of the first firm. These schemes were popular in the 1980s in Japan before the government instituted harsher civil laws and eventually criminalized the practice. The

Enron scandal The Enron scandal was an accounting scandal sparked by American energy company Enron, Enron Corporation filing for bankruptcy after news of widespread internal fraud became public in October 2001, which led to the dissolution of its accounting ...

revealed that

had extensively made use of sub-corporations to offload debts and hide its true losses in a Tobashi fashion.

Lehman Brothers' Repo 105 scheme

Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...

utilized

repurchase agreements A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of secured short-term borrowing, usually, though not always using government securities as collateral. A contracting party sells a security to a lend ...

to bolster profitability reports with their

Repo 105 Repo 105 is Lehman Brothers' name for an accounting maneuver that it used where a short-term repurchase agreement is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, allowing the company to appear to redu ...

scheme under the watch of the accounting firm

Ernst & Young EY, previously known as Ernst & Young, is a multinational corporation, multinational professional services partnership, network based in London, United Kingdom. Along with Deloitte, KPMG and PwC, it is one of the Big Four accounting firms, Big F ...

. The scheme consisted of mis-reporting a repurchase agreement (a promise to re-buy a liability or asset after selling it) as a sale, and timing it exactly in a way that half of the transaction was completed before a profitability reporting deadline, half after—hence bolstering profitability numbers on paper. Public prosecutors in New York filed suit against EY for allowing the "accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman's balance sheet in order to deceive the public about Lehman's true liquidity condition".

had done exactly the same about 10 years earlier; in their case,

Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...

aided Enron in bolstering profitability close to earnings periods by willfully entering repurchase agreements to buy Nigerian barges from Enron, only for Enron to buy them back a few months later. The

U.S. Securities and Exchange Commission The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...

(SEC) filed charges and convicted multiple Merrill Lynch executives of aiding the fraud.

Currency swap concealment of Greek debt by Goldman Sachs

In 2001–2002,

Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...

aided the government of

Greece Greece, officially the Hellenic Republic, is a country in Southeast Europe. Located on the southern tip of the Balkan peninsula, it shares land borders with Albania to the northwest, North Macedonia and Bulgaria to the north, and Turkey to th ...

after its admission to the Eurozone to better its deficit numbers by conducting large currency swaps. These transactions, totaling more than 2.3 billion Euros, were technically

loans In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the debt ( ...

but concealed as currency swaps in order to circumvent

Maastricht Treaty The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve Member state of the European Union, member states of the European Communities, ...

rules on member nations deficit limits and allowed Greece to "hide" an effective 1 billion euro loan. After Goldman Sachs had engineered the financial instrument and sold it to the Greeks—simply shifting the liabilities in the future and defrauding investors and the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

, the investment bank's president

Gary Cohn Gary David Cohn (born August 27, 1960) is an American businessman and philanthropist who served as the 11th director of the National Economic Council and chief economic advisor to President Donald Trump from 2017 to 2018. He managed the administ ...

pitched Athens another deal. After Greece refused the second deal, the firm sold its Greek swaps to the Greek national bank and made sure its Short and

Long Long may refer to: Measurement * Long, characteristic of something of great duration * Long, characteristic of something of great length * Longitude (abbreviation: long.), a geographic coordinate * Longa (music), note value in early music mens ...

positions towards Greece were in balance—so that a potential Greek default would not affect Goldman Sachs.

Parmalat's mis-accounted credit-linked notes

Italian dairy giant

Parmalat Parmalat S.p.A. is an Italian dairy and food corporation which is a subsidiary of French multinational company Lactalis. It was founded by Calisto Tanzi in 1961. Having become the leading global company in the production of long-life milk us ...

employed a number of creative accounting and wire fraud schemes before 2003 that lead to the largest bankruptcy in European history. It sold itself Credit-linked notes with the help of

through a

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special-purpose entity A special-purpose entity (SPE), also called a special-purpose vehicle (SPV) or a financial vehicle corporation (FVC), is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, speci ...

and over-accounted for their value on the balance sheet. It also forged a $3.9Bn check from

Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...

. The publicly listed company stated to investors that it had about $2Bn in liabilities (this figure was accepted by its auditors

Deloitte Deloitte is a multinational professional services network based in London, United Kingdom. It is the largest professional services network in the world by revenue and number of employees, and is one of the Big Four accounting firms, along wi ...

and

Grant Thornton International Grant Thornton is a multinational professional services network based in London, United Kingdom. It is the seventh-largest in the world by revenue and the sixth-largest by number of employees. The network consists of independent accounting a ...

), but once audited more vigorously during the bankruptcy proceedings, it was discovered that the company's debt turned out to actually be $14.5Bn. This massive debt was largely caused by failed operations in Latin America and increasingly complex financial instruments used to mask debt—such as Parmalat "billing itself" through a subsidiary called Epicurum. It was also discovered that its CEO

Calisto Tanzi Calisto Tanzi (17 November 1938 – 1 January 2022) was an Italian businessman. He founded Parmalat in 1961, after dropping out of college. Parmalat collapsed in 2003 with a €14bn ($20bn; £13bn) hole in its accounts in what remains Europe's ...

had ordered the creation of shell accounts and diverted 900M Euros worth into his private travel company.

Offshoring and tax avoidance

In order to avoid taxes on profits, multinational corporations often make use of offshore

subsidiaries A subsidiary, subsidiary company, or daughter company is a company completely or partially owned or controlled by another company, called the parent company or holding company, which has legal and financial control over the subsidiary company. Unl ...

in order to employ a creative accounting technique known as "Minimum-Profit Accounting". The subsidiary is created in a

tax haven A tax haven is a term, often used pejoratively, to describe a place with very low tax rates for Domicile (law), non-domiciled investors, even if the official rates may be higher. In some older definitions, a tax haven also offers Bank secrecy, ...

—often just as a shell company—then charges large fees to the primary corporation, effectively minimizing or wholly wiping out the profit of the main corporation. Within most of the

and the

, this practice is legal and often executed in sight or with explicit approval of tax regulators.

Nike, Inc. Nike, Inc. (stylized as ''NIKE'') is an American athletic footwear and apparel corporation headquartered near Beaverton, Oregon. It is the world's largest supplier of athletic shoes and apparel and a major manufacturer of sports equipment, ...

used this method by selling its

Swoosh The Swoosh is the logo of American sportswear designer and retailer Nike. Today, it has become one of the most recognizable brand logos in the world, and the most valuable, having a worth of $26 billion alone. Bill Bowerman and Phil Knight fou ...

logo to a

Bermuda Bermuda is a British Overseas Territories, British Overseas Territory in the Atlantic Ocean, North Atlantic Ocean. The closest land outside the territory is in the American state of North Carolina, about to the west-northwest. Bermuda is an ...

-based

subsidiary for a nominal amount, and then went on to "charge itself" licensing fees that Nike Inc. had to pay to the subsidiary in order to use its own brand in Europe. The Dutch tax authorities accepted this siphoning structure, but did not publish the private agreement they had with Nike. The licensing fees totaled $3.86Bn over the course of three years and were discovered due to an unrelated U.S.-based lawsuit as well as the

Paradise Papers The Paradise Papers are a set of over 13.4 million confidential electronic documents relating to offshore investments that were leaked to the German reporters Frederik Obermaier and Bastian Obermayer, from the newspaper'' Süddeutsche Z ...

. In 2014, the Bermuda deal with Dutch authorities expired, and Nike moved the profits to another offshore subsidiary, a

Netherlands , Terminology of the Low Countries, informally Holland, is a country in Northwestern Europe, with Caribbean Netherlands, overseas territories in the Caribbean. It is the largest of the four constituent countries of the Kingdom of the Nether ...

-based Limited Liability Partnership (CV, short for Commanditaire Vennootschap, generally known as a

Kommanditgesellschaft A (abbreviated KG, ; from + ) is the German name for a limited partnership business entity and is used in German, Belgian, Dutch, Austrian, and some other European legal systems. In Japan, it is called a '' gōshi gaisha''. Its name derives ...

). Through a Dutch tax loophole, CV's owned by individuals that are residing in the Netherlands are tax-free. Exploiting this structure saved Nike more than $1Bn in taxes annually and reduced its global tax rate to 13.1%; the company is currently being pursued for billions of dollars of

back taxes Back taxes is a term for taxes that were not completely paid when due. Typically, these are taxes that are owed from a previous year. Causes for back taxes include failure to pay taxes by the deadline, failure to correctly report one's income, or ...

in litigation by multiple governments for this multinational

tax avoidance Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxe ...

In popular media

A number of center around financial scandals and

securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information.Enron: The Smartest Guys in the Room'' * ''Inside Job'' (2010 film) *

PBS The Public Broadcasting Service (PBS) is an American public broadcaster and non-commercial, free-to-air television network based in Arlington, Virginia. PBS is a publicly funded nonprofit organization and the most prominent provider of educat ...

documentary film based on ''

The Ascent of Money ''The'' is a grammatical article in English, denoting nouns that are already or about to be mentioned, under discussion, implied or otherwise presumed familiar to listeners, readers, or speakers. It is the definite article in English. ''The ...

'' * Documentary based on ''

The Commanding Heights ''The Commanding Heights: The Battle for the World Economy'' is a book by Daniel Yergin and Joseph Stanislaw first published as ''The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World'' in 1 ...

'' * '' Betting on Zero'' * '' The China Hustle'' * ''Dirty Money'' * ''

£830,000,000 – Nick Leeson and the Fall of the House of Barings ''Inside Story Special: £830,000,000 – Nick Leeson and the Fall of the House of Barings'', sometimes referred to as ''25 Million Pounds'', is a British television documentary by filmmaker Adam Curtis released on 12 June 1996. It details the c ...

'', about

Nick Leeson Nicholas William Leeson (born 25 February 1967) is an English former derivatives trader whose fraudulent, unauthorised and speculative trades resulted in the 1995 collapse of Barings Bank, the United Kingdom's oldest existing merchant bank ...

and

Barings Bank Barings Bank was a British merchant bank based in London. It was one of England's oldest merchant banks after Berenberg Bank, Barings' close collaborator and German representative. It was founded in 1762 by Francis Baring, a British-born member ...

* '' The Inventor: Out for Blood in Silicon Valley'' * '' Chasing Madoff'', about the

Madoff investment scandal The Madoff investment scandal was a major case of stock and securities fraud discovered in late 2008. In December of that year, Bernie Madoff, the former Nasdaq chairman and founder of the Wall Street firm Bernard L. Madoff Investment Securities ...

* '' The Price We Pay'' * '' Fyre'' and ''

Fyre Fraud ''Fyre Fraud'' is a 2019 American documentary film about the fraudulent Fyre Festival, a 2017 music festival in the Bahamas. It was directed by Julia Willoughby Nason and Jenner Furst, and premiered on January 14, 2019, on Hulu. Premise The fil ...

'', two competing documentaries about the

Fyre Festival Fyre Festival was a luxury music festival organized by American businessman Billy McFarland and American rapper Ja Rule. It was originally created to promote the company's Fyre app for booking music talent. The festival was scheduled to take pl ...