The views of Robert Maxwell and Harold Edey on accounting policy, creative accounting and regulation

Robert Maxwell was credited with saying that Accountancy is not the exact science which some of us once thought it was, and in an academic paper, Edey (1989) stated that Accounting reports can provide no more than approximate (rough is a better term) indications of the financial health and state of a business. Profit is no more than an estimate of how well a business has performed; how good an estimate it is in specific cases is dependent upon the nature of the business being reported upon and the appropriateness of the accounting policies selected. Using relevant examples critically discuss and debate these statements.

The thoughts of Robert Maxwell and Harold Edey on the nature and significance of accounting have proven to be prophetic. The practice of showcasing and window-dressing the financial status of a business corporation is as old as the institution of accounting itself. These practices are not always carried out with malicious intent, but more often than not, the practice of creative accounting is a harbinger for trouble in the future. During the last few years, “incidences of “creative” and even fraudulent accounting practices have been revealed with an unexpected frequency and order of magnitude. Names like “Enron”, “Lehman Brothers” and “Worldcom” no longer represent stories of growth and business success. Instead, they have become the most conspicuous symbols of all the accounting shenanigans and accompanying audit failures that have shaken the public’s confidence in financial reporting.” In this context the insightful thoughts of accountancy experts such as Robert Maxwell and Harold Edey carries additional importance. The rest of this essay will critically evaluate their view of accountancy by referring to relevant examples.

Although the term ‘creative accounting’ has a positive ring to it, suggesting something innovative and brilliant, in reality it is little more than a euphemism for accounting practices that do not adhere to the spirit of accounting principles. These practices entail adding complexities to accounting information as well as finding novel ways of representing income, assets/liabilities, etc. Such deviations from normal accounting practices are carried out with the intent of deceiving or manipulating the readers’ understanding of the financial situation of the company. The readers are usually the stakeholders in the company, including shareholders, lenders, suppliers/vendors, taxing agencies, regulatory authorities, etc (Deegan & Unerman, 2006). In other words, how well a business corporation performs in financial terms is significant for a broad group of people that includes potential/existing investors, creditors, employees or managers. With differing information needs and purposes, each category of stakeholders should be provided with data that is comprehensive, relevant and reliable, so as to allow an informed opinion to be reached on the corporation’s financial performance (Deegan & Unerman, 2006). The following passage places the practice of ‘creative accounting’ in the context of information needs by various stakeholders:

“Preparers of financial statements are in a position to manipulate the view of economic reality presented in those statements to interested parties. There are two principal categories of manipulative behavior. The term ‘macro-manipulation’ is used to describe the lobbying of regulators to persuade them to produce regulation that is more favorable to the interests of preparers. ‘Micro-manipulation’ describes the management of accounting figures to produce a biased view at the entity level. Both categories of manipulation can be viewed as attempts at creativity by financial statement preparers. These manipulations can be regarded as morally reprehensible. They are not fair to users, they involve an unjust exercise of power, and they tend to weaken the authority of accounting regulators.” (Akhigbe, et. al., 2005)

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