Palmart, Enron, and WorldCom are considered the greatest corporate disasters in the accounting circles. These companies were all brought to bankruptcy by the use of creative accounting. The result was massive losses to shareholders, creditors, and other institutional investors. The question remains whether stringent guidelines in accounting could have prevented these disasters. Creative accounting refers to the art of circumventing accounting standards to meet one’s own needs. This is usually done by meeting the minimum requirements of the standard but ignoring the details. Accountants who practice this terrible art ensure that their misdemeanors are just below the auditor’s threshold for materiality. That way, it takes a long time before the crimes are discovered.
Accounting standards attempt to regulate the practice of accounting worldwide. Some standards provide an alternative treatment for items. The alternatives are usually based on the size of the firm. Some rules are more flexible for smaller companies. This creates the temptation to understate a company’s size to benefit from the exemptions. Various recognition criteria must be met before items are recognized in the financial statements. Accountants ensure that illegal items do not feature on the financial statements with the excuse that they do not meet the recognition criteria. Decreasing the flexibility of accounting standards does not guarantee fewer scandals. The more rules are created, the more accountants will find ways to break them. The solution is to find ways to promote integrity among accountants. This will lead to self-regulation and eventually fewer corporate scandals.