Performance of a company
Question 1:
The performance of a company is generally indicated by the values that are presented through accounting. Performance determines the position of a company among its competitors and in the market in general. The performance also affects share prices and influences investors. It is therefore in the best interest of any company to portray high levels of performance. The need to achieve these high levels of performance has led to an increase in activities such as relative accounting, creative accounting and fraud. This essay describes these activities and describes the main methods used in creative accounting and their importance. Impression management in accounting is also related to creative accounting. Impression management provides a view of a company’s performance which favours the performance of the company. In impression management, financial presentations are heavily altered such as the manipulation of financial graphs.
Preparers of accounts often exploit the flexibility feature in accounting to manipulate figures and presentation of accounts. Thus exploitation is referred to as creative accounting. However, flexibility in accounting is meant to show reality in accounting. Fraudulent activities are criminal activities aimed at gaining financial benefits and do not operate within regulatory frameworks. Creative accounting cannot be classified as a fraudulent activity as it operates within a regulatory framework. However despite operating inside the regulatory framework, preparers of the accounts. Relative accounting is facilitated by allowing the existence between reality and estimation of accounting figures.
There are many methods that preparers use in creative accounting. One of the main methods is increasing incomes through different techniques such as the inclusion of fictions sales in the financial statements. Increasing the incomes portrays an image where the company is making more than it is making. Examples of other techniques used to increase incomes include eliminating creditors or recording loans as sales. Another method used in creative accounting is the decrease in expenses. Decreasing expenses translates to greater profits recorded. Decreasing expenses can be done through employing techniques such as the big bath technique, increasing inventories and recording lesser expenses. Increasing assets is also used as a method in creative accounting. Assets translate to the value of a company and ratios that include assets are used to gauge the performance of a company. Increasing assets, therefore, leads to a higher value of the company and indicates better performance. The balance sheet net worth of the company increases. Increasing assets can be done through the overvaluation of fixed assets and including intangibles. Decreasing liabilities is also used in creative accounting. Decreasing liabilities translates to a higher value of the company on the balance sheet and is achieved through recording debt as equity and financing activities through funds that are not recorded in financial statements.
In most instances, managers support creative accounting as it is generally beneficial to the company. There are some instances where creative accounting is considered by managers such as when the existence of the company is threatened. In conclusion, the use of creative accounting is not fraudulent but breaks the code of conduct by the company in the business world.
Question 2:
Creative accounting is not the only technique used to create a biased view of a company. However, this technique is relatively cheap. When the technique is not viable, other techniques can be employed by the managers. Managers have many avenues that allow them to create a bias due to their high ranks and authority in firms. This essay explains other techniques that managers use to create a biased view of the performance of a firm. A biased view is created by the managers for different purposes such as to increase share prices and depict a more successful management model that favours the manager.
One of the techniques that managers can employ include bribery and corruption. Bribery and corruption take many forms such as kickbacks, manipulation of contracts and bid-rigging. Corruption generally gives a competitive advantage to a firm in the market. Through corruption, the company can control information that is leaked to the public for their advantage. An example of cases when bribery creates a false image of a company is when bloggers acquire sensitive information and bribes have to be paid to keep the information unpublished.
Another technique that managers can use to create a bias towards a firm is the adoption of false advertising. False advertising directly portrays what the managers want the general public to see. Advertising is a very powerful tool in the promotion of firms and is carried out for different purposes such as introducing new products or correcting the image of the firm. Successful false advertising may bias the opinion of the public leading to an increase in demand for shares and a successful increase in prices which is beneficial to managers. False advertisement is a fraudulent activity. Managers may also deliberately act to manage the impressions of a firm by only highlighting their achievements that are favourable and depict a positive image and high performance of the firms.
Management can also create a biased view on performance by eliminating past years when the performance of the company was poor and highlighting recent successes. This is referred to as the recency effect. This has led to the renaming of companies in some instances or purported change in ownership which creates a biased image. The managers use the recent period to depict a picture of a very successful company despite there being previous massive failures. The recent successes so a firm may be due to an occurrence in the market which is favourable to the business translating to better performance which may not last in the long run.
In conclusion, managers can influence the way a firm presents its progress. Due to various factors managers may feel the need to alter certain factors or adopt certain policies to bias views on performance. The factors do not exclusively include manipulation of account numbers.