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Running head: ACCOUNTING QUALITY
Cases of creative accounting cause many financial losses. Investors are led to
believing false accounting. Managers are keen on meeting the set of financial targets.
Achieving such levels of profits enables them to get more bonuses. The pressure to perform
has led to the managers resorting to creative accounting. Some of the methods include
inventory write-downs, underreporting costs, and over-reporting revenues. This move enables
them to meet the set profits and revenue targets.
On the other hand, investors and other stakeholders rely on financial statements to
make decisions. Financial institutions extend credit facilities to the company based on various
economic data. Investors would also purchase the company shares based on the balance sheet
and the income statement.
Enron scandal demonstrates measurement error. The management team intentionally
reported fictitious results. There was collusion between the company managers and the
auditors who gave unqualified opinions. The figures in the income statement were
manipulated to show increased profits. On the other hand, the balance sheet showed a higher
value of assets, while the liabilities were under-reported. It was hard to establish the real
worth of the company at any point in time.
Actions resulting in the errors
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