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Evan Davis on... creative accounting

Updated Friday, 20th November 2009

Evan Davis from The Bottom Line gives us his opinion on creative accounting.

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Evan Davis

There’s a long and illustrious tradition of companies trying to massage the books, trying to make themselves look more profitable than they really are using creative accountancy.  And I want to make a point about this, that isn’t a point about accountancy at all, but is a point about human beings and their psychology.  And the problem is this, that human beings don’t like dissonance in their mind.  They don’t like to say one thing and believe another thing.  We just seem to be programmed that way.  And we’ll usually resolve it either by changing what we say or by changing what we think.  Now, if we go around publishing accounts that make our company look highly profitable, and if we don’t believe those figures that we’re publishing, we’ll either come round to stop publishing those accounts or, and this is the real danger, we’ll come round to believing the accounts ourselves, to believing our own propaganda.

Now, in general, that is the danger of creative accountancy, it doesn’t fool the rest of the world because you can publish flattered income figures in one year, but ultimately everyone’s going to find out the money wasn’t there.  Take Enron, they published creative accounts that made the company look much richer than it truly was, but it didn’t really do them any good in the long term at all when they went bust.  So, no, you don’t fool everybody else, but you do fool yourself.  The deception flips around and works on the deceiver rather than the people they were trying to deceive.  That is the danger of creative accounts: it misleads the management who engage in it. 

Well, that’s my opinion; you can join the debate with the Open University.

(1’37”)

 

 

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