Creative accounting, accounting errors, and the ability of users to detect and adjust for them

• Published in: SA journal of accounting research 2008-01, Vol.22 (1), p.45-95
• Main Authors: Ruddy, T, Everingham, G K
• Format: Article
• Language: English
• Subjects: accounting students; Creative accounting; detection rates
• ISSN: 1029-1954; 2376-3981
• DOI: 10.1080/10291954.2008.11435132

Creative accounting refers to the various practices management use to manipulate financial statements in an effort to cause users to draw desired conclusions. The literature reveals that creative accounting is indeed practised in a number of countries, including South Africa. This paper examines the extent to which final year South African accounting students are able to detect and adjust for creative accounting practices and for errors resulting from incorrect application of accounting standards. A case study based experimental approach was adopted to achieve this objective, using the 2002 final year accounting students as subjects, at a major residential university, and a case study developed to include 11 creative accounting practices (including misapplication of standards). On average, the students detected 4.75 of the 11 inappropriate practices incorporated into the case study. The detection rate for each of the 11 practices varied between 10% and 84% and was influenced by their location within the financial statements; the average detection rate for practices located in the statement of accounting policies was significantly higher than that for practices located in the notes to the financial statements. Findings are compared with the Breton and Taffler (1995) study of stockbroker analysts in the United Kingdom and suggest that abilities to detect and correct for creative accounting practices are influenced by the level of accounting knowledge, and the extent of experience with such issues in practice.