Creative accountingOne case of overstating revenue is said to have been carried out by the Xerox
Corporation, a large US business and a leading player in the photocopying industry.
It is alleged that Xerox brought forward revenues in order to improve reported profits
as its fortunes declined in the late 1990s. These revenues related to copier equipment
sales, particularly in Latin America. Following the uncovering of the overstatement of
revenues, Xerox had to restate its equipment sales revenue figures for a five-year
period. The result was a reversal in reported revenues of a staggering $6.4 billion,
although $5.1 billion was reallocated to other revenues as a result. This restatement
was one of the largest in US corporate history.
A more recent example of revenue overstatement involved Dell Inc, the US com-
puter business. In August 2007, Dell admitted that some unnamed ‘senior executives’
had been involved in a scheme to overstate sales revenue figures during the period
2003 to 2007. This was done in an attempt to make it appear that quarterly sales
targets had been met, when in fact this was not the case. The overstatement of sales
revenue was estimated to amount to $92 million; this represented about 1 per cent of
total profit over the period concerned.
Some creative accounting methods focus on the manipulation of expenses, and
certain types of expenses are particularly vulnerable. These are expenses that rely
heavily on the judgement of directors concerning estimates of the future or con-
cerning the most suitable accounting policy to adopt.
The incorrect ‘capitalisation’ of expenses may also be used as a means of manipula-
tion. Capitalisation is treating expenses as if they are part of the cost of a non-current
asset. Businesses that build their own assets are often best placed to undertake this
form of malpractice. The effect of capitalisation of expenses is falsely to boost both
profit and the balance sheet value of non-current assets.
One particularly notorious case of capitalising expenses is alleged to have occurred
in the financial statements of WorldCom(now renamed MCI), a large US telecommun-
ications business. WorldCom is alleged to have overstated profits by treating certain
operating expenses, such as basic network maintenance, as if they were the acquisition
of a non-current asset. This happened over a fifteen-month period during 2001 and
- When this overstatement was revealed, operating profits had to be reduced by a
massive $3.8 billion.
Some creative accounting methods focus on the concealment of losses or liabilities. The
financial statements can look much healthier if these can somehow be eliminated. One
way of doing this is to create a ‘separate’ entity that will take over the losses or liabilities.
Perhaps the most well-known case of concealment of losses and liabilities con-
cerned the Enron Corporation. This was a large US energy business that used ‘special
purpose entities’ (SPEs) as a means of concealment. SPEs were used by Enron to rid
itself of problem assets that were falling in value, such as its broadband operations. In
addition, liabilities were transferred to these entities to help Enron’s balance sheet look
healthier. The business had to keep its gearing ratios (the relationship between bor-
rowings and equity) within particular limits in order to satisfy credit-rating agencies,
and SPEs were used to achieve this. The SPEs used for concealment purposes were not
independent of the business and should have been included in the balance sheet of
Enron, along with their losses and liabilities.
When these, and other accounting irregularities, were discovered in 2001, there
was a restatement of Enron’s financial performance and position to reflect the con-
solidation of the SPEs, which had previously been omitted. As a result of this restate-
ment, the business recognised $591 million in losses over the preceding four years and