As noted by Mudel, there are six major factors that can motivate the use of creative accounting by managers. First of all, this can be desirable in order to meet certain targets that were established for the period. Some examples of such targets can be the expected values of sales, profits, or the financial performance of the corporate share prices. As a result of meeting these goals, managers of the companies can be awarded higher quarterly or annual bonuses, expect a faster promotion or simply get a better reputation within the company. The second similar motivating factor is meeting the expectations of external stakeholders. Some examples of these stakeholders can be customers, creditors and investors.
The third frequently quoted motivation for creative accounting is to achieve lower volatility of income streams, or, in other words, income smoothing. This can be helpful to achieve and retain a positive sentiment among investors and keep share prices stable. The fourth motivation for creative accounting is the so-called “window dressing”, which essentially means improving the image of the company in the eyes of the public. For example, this can be relevant when the considered company is planning to apply for a large loan or is preparing an initial public offering (IPO).
The fifth reason that motivates creative accounting is achieving some types of benefits from taxation. Some acceptable alterations in the estimates or timing of business operations can potentially produce lower taxes, which are used by companies’ managers. The sixth and last motivation for creative accounting noted by Mudel is the change in management. The author quotes some evidence showing that new managers tend to report more losses caused by the inferior management practices of the old managers.
In some specific cases, companies can also have other more unusual motivations for creative accounting that were not mentioned above. For instance, some of the firms that are subjected to government regulations concerning the amounts they can charge (such as utilities or telecom companies) may be more inclined to reduce their reported profits in order to avoid lower price ceilings.