Part III

Introduction : Analysis on the creative accounting in the Malaysia private sector

The chapter reviews the key literature concerned with the analysis on the creative accounting
in the Malaysia private sector. Our research contributes to several streams of literatures which
have conducted extensive research in concept of creative accounting, determinants of creative
accounting, some focusing on how creative accounting impact companies, others on methods
used in using creative accounting. Issues regarding creative accounting have received a lot of
attention in the literature. However, some studies are predominantly focused on public sector
companies. This study can provide some usefulness for better understanding creative
accounting concepts and some loopholes of accounting policies. Hence, this review critically
explores roles of creative accounting in Malaysia private sector by given some examples of
real life Malaysia companies and methods and techniques used by perpetrator in using
creative accounting.
Concept of Creative Accounting
Creative Accounting refers to innovative methods for displaying account information that
deviate from accounting policies in order to convey a good image of a company's financial
condition. Susmus and Demirhan (2013) described Creative Accounting as innovative
accounting, financial engineering, cosmetic accounting, and income smoothing as synonyms.
According to (Mohd Ali et al., 2020) comments that creative accounting can be considered
legal or illegal based on its objectives. Nevertheless, it is challenging to predict when such
behaviour will become illegal. Gupta & Kumar, 2020 claimed that creative accounting
practises do not frequently violate the rules or are deemed illegal; even so, creative
accounting executives utilise grey areas in the rules in order to portray the firm's financial
position based on desires stipulated by management. Therefore, creative accounting enable
them to understated or overstated the firm's financial condition, resulting in poor credibility
of accounting and financial reporting.
Motivations of Creative Accounting and Financial Reporting Quality in Private Sector
The basic concept of creative accounting is based on identifying as such gaps in laws and
accounting principles in order to improve financial statements and portray the company in a
favourable manner. Several studies have discovered factors that motivate companies to
manipulate earnings, such as agency theory, tax policy changes (Kamau et al., 2012), income
taxation, stakeholder trust, and violation of debt contract (Li and Richie, 2016). In the private
sector, the agency assumption suggests that there will be circumstances in which
representatives will try to maximise their own benefit by manipulating the financial reporting
variables to their principals. Jones (2011) classified the explanations for recourse to creative
accounting into the following categories which include unusual circumstances, external
expectations, personal benefits and fraud concealment This has also been explored in prior
studies by (Skoda et al., 2017) that there are some primary factors contribute to creative
accounting which include ethical dilemmas, disclaimer quality, internal control, and
corporate structure. It can show a support from Bhasin, M. L. (2016), it claimed that upper
management and accountants are usually responsible for implementing creative accounting,
to get the positive outcomes such as attracting foreign investment and increased competition.
For decades, previous studies have been fascinated by the phenomenon of creative
accounting, particularly its significance for the quality of financial reporting (Abed et al.,
2022). According to Yadav (2014), financial statements that are legally prepared but consist
some degree of creative accounting may consider financial reporting's credibility into doubt.
Despite the fact that a few procedures have been developed by academics and practitioners to
detect financial reporting manipulation, the practise of creative accounting tends to persist,
and to affect the quality of financial reporting.
Methods and Techniques of Creative Accounting
According to Nyabuti et al., (2015), understatement is one of the methods of creative
accounting to affect tax liabilities. It is agreed by Desai and Dharmapala, (2009) that point
out manipulation of income may affect company’s value and regulatory costs which related
to reduction in tax planning. However, somebody had pointed out that both with the intension
of underestimating liabilities and overestimating assets in private sector creative accounting
is one of the methods of soothing financial results to best reflect the edges of value and
capital maximising agents. In 2010, Howard M. &Jeremy Perler, (2010) have divided that
creative accounting techniques into several major categories, which are as follows: changes
in accounting policies, alteration of accruals, overestimation revenue by fictitious
transactions, alteration of written off receivables and failure to record liabilities.
Findings & Discussions
This discussions will analyse some methods and impacts of creative accounting used by
several companies Malaysia in private sector. In Securities Commissions Malaysia (SCM),
there are some examples companies in private sector which involved in creative accounting,
MEMS Technology Berhad and Silver Bird Berhad. It is proved by Omar & Md Yusof,
(2021), who summarized that was imposed to intentionally authorizing the provision of a
false statement to Bursa Malaysia Berhad. The misleading statement refers to Mems
Technology Berhad group's revenue for the financial year ended 31 July 2007. According to
SCM 2009, it claimed that there are million worth of fictitious sales in group revenue of
MEMS in 2007 unaudited financial report. Consequently, MEMS was to be inconsistent the
accounting standard of MFRS 118 on recognition of revenue in preparing financial statement
(FS) of 2017. According to disclosure notes of FS 2017, it had arouse some concerns and
matters, which include inconsistent of purchase amount and deposit paid, incorrect amount in
other payables and accrued expenses and especially lack of verified or proper documents to
ensure authenticity. There are unusual figures from 2007 to 2009 be shown in Appendix 1.
According to SCM (2022), Silver Bird had been charged for furnishing false statements in
financial reporting. Silver Bird is a wide range of bakery manufacturer. According to the
forensic report, the Silver Bird group's accounts receivable included inaccurate general ledger
that could create a false audit log, as well as the spoofed of cross transfers as debtor payments
(The Star, 2012). It also noted that the supplement goods were not match with the sales, and
lack of documentation support. The forensic report noted that there are some ignored
payments and inter transactions with subsidiaries, Stanson Marketing Sdn Bhd, were not
verifiable and out of evidences. Furthermore, there was also lack of physical evidence and
proper documents for its inventories.
Based on real life Malaysia companies above, it can discover that the motives of them to
involve creative accounting is similar which include financial distress, display a good
financial result, to attract investors and to keep and push the share price. Hence, the analysis
on creative accounting in Malaysia private sector can be related to motivations and impacts
on credibility of financial reporting. Further, the major techniques of creative accounting used
usually are sales, receivables and payables, which can help to reflect a good financial
condition sooner.
In overall, this literature concluded that the extent to which creative accounting has remained
controversial. The results on this creative accounting are mixed, which can be both legal or
illegal. While some research has been carried out on illegal ways of creative accounting,
much less is known about some legal ways of creative accounting to utilise accounting
policies in a legal way without affect financial report quality.
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Appendix 1 : Statistical Analytic Procedures
Appendix 2 : MEMS Technology Berhad (horizontal analysis from 2007-2009)