ACCOUNTING THEORY AND EMERGING ISSUES (FAR 661)

GROUP PROJECT WRITTEN REPORT: CREATIVE ACCOUNTING

MAC2206D

GROUP MEMBERS:

NAME STUDENT ID

AZRI MUZAFFAR BIN ISMAIL 2022996511

ADHAM SYAHMI BIN SHAFIE 2022900919

MUHAMAD ILMAM HASIF BIN RAFIE 2021858122

MUHAMMAD LUQMAN HAKIM BIN MOHD FADHLI 2022923377

MUHAMMAD ELYAS SYAHIR BIN MOHAMAD SALLEH 2022905357

PREPARED FOR: DR AZLINA BINTI RAHIM

SUBMISSION DATE: 5 JANUARY 2024

INTRODUCTION

a) Explain the importance of financial reporting

TechNova's story highlights the importance of financial reporting in a number of ways:

Transparency and accountability

Accurate and transparent financial reporting gives stakeholders a clear picture of a
company's financial health. This allows investors to make informed decisions about whether
to invest in the company and creditors to assess the risk of lending money. In the case of
TechNova, a lack of transparency and creative accounting practices masked the true state of
the company, leading to significant losses for investors and creditors when the house of
cards finally collapsed.

Decision making
Reliable financial reporting is essential for informed decision-making at all levels of an
organisation. Management uses them to monitor performance, identify areas for
improvement and allocate resources effectively. Investors rely on them to evaluate potential
investments and manage risk. Lenders use them to assess creditworthiness and determine
loan terms. In the case of TechNova, misleading financial reports led to poor investment
decisions by both investors and creditors, causing significant financial damage.

Maintaining confidence
Confidence in financial markets is fundamental to their proper functioning. Accurate and
transparent financial reporting helps to maintain that trust by ensuring that all participants
have access to the same information. TechNova's fraudulent practices undermined
confidence in the market, deterring future investment and potentially affecting other
companies in the same sector.

Regulation and compliance

Financial reporting standards and regulations are in place to protect investors and creditors
from fraud and deception. These regulations guide companies in their reporting practices
and provide a framework for accountability. The TechNova case highlights the importance of
these regulations and the need for strong enforcement to prevent similar incidents.

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 b) Connecting Agency Theory, Positive Accounting Theory, and Efficient Market
Hypothesis to Creative Accounting:

These three theories offer different perspectives on how creative accounting can arise and
its potential impact.

According to Agency Theory, there is a conflict of interest between principals

(investors/creditors) and agents (managers), which leads to managers manipulating
earnings to achieve personal goals like bonuses, promotions, or avoiding scrutiny. The
impact of this is not specified in the given text. Overstated profits may initially attract
investment and loans, but ultimately harm stakeholders when the truth emerges.

Positive Accounting Theory (PAT) explains why firms choose specific accounting policies
and how those choices affect contracts and firm value. The motivation for creative
accounting should be avoided as it can lead to unethical practices. Managers select
accounting methods that project a favourable image to the market, even if they do not reflect
economic reality.

This can attract investment in the short term, but may lead to market crashes when
overvaluation becomes unsustainable. The Efficient Market Hypothesis (EMH) assumes that
asset prices reflect all available information efficiently. Challenge to Creative Accounting:
The market should eventually discover and penalise manipulation unless it is very
sophisticated. However, the Efficient Market Hypothesis (EMH) is often oversimplified.
Market inefficiencies and investor overconfidence can allow creative accounting to persist for
some time.

This section explores the links and interactions between these factors. Agency problems
may incentivise creative accounting, which aligns with PAT's view of strategic choice in
accounting methods. However, it is important to note that creative accounting that distorts
financial reality can hinder the EMH's assumption of efficient pricing. The effectiveness of
creative accounting depends on the interplay of agency incentives, information asymmetry,
and market efficiency.

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Examples:
TechNova case: Alice employed earnings management techniques to meet bonus
targets and attract investment (Agency Theory and PAT), but it ultimately led to the
collapse of the stock price (EMH failure).
Companies may use earnings management to smooth out fluctuations in earnings to
appear more stable, attracting investors even if the underlying performance is not
strong.

c) Pictograph of Regulatory framework of creative accounting :

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 d) Reproduce a single instance of a Malaysian landmark accounting scandal that was
embroiled in a high-profile case of creative accounting and highlight the impact on
shareholders.

1MDB scandal:
A case study in creative accounting and shareholder devastation.
The 1Malaysia Development Berhad (1MDB) scandal remains one of the most prominent
and complex financial scandals in Malaysian history. It involved high-level government
officials, international banks and a web of intricate financial transactions designed to conceal
massive misappropriation of funds. While the 1MDB saga may not have involved 'creative
accounting' in the conventional sense, it did involve similar tactics to hide thHe financial
reality and mislead investors.

The scheme:
Overvalued assets: 1MDB acquired assets at inflated prices through opaque transactions
and intermediaries, inflating the reported value of the company and attracting further
investment. For example, 1MDB bought a power plant in Tanjung Jimah, Malacca for $1.39
billion, almost double its estimated market value.

Hidden debt: Billions of ringgit in loans and guarantees were channelled through off-balance
sheet entities and complex financial instruments, masking the true extent of 1MDB's
liabilities. This included the use of "petrodollar bonds", which were issued with inflated oil
price assumptions and eventually defaulted, leaving the Malaysian government with billions
of dollars of debt.

Misuse of funds: Funds raised through bond issues and asset sales were diverted to
personal accounts, luxury purchases and political patronage, enriching those involved in the
scheme. This included lavish spending on jewellery, yachts and artwork by key figures such
as Jho Low, a close associate of former Prime Minister Najib Razak.

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Impact on shareholders:
Loss of public funds: 1MDB was ultimately funded by Malaysia's sovereign wealth funds,
meaning that the scandal has resulted in direct losses to the Malaysian people. It is
estimated that over $4.5 billion of 1MDB funds were misappropriated.

Market instability: Uncertainty over 1MDB's financial health undermined investor confidence
in the Malaysian market, with knock-on effects for other companies and sectors. The scandal
led to a significant decline in the value of the Malaysian ringgit and a loss of foreign
investment.

Damage to its reputation: The 1MDB scandal tarnished Malaysia's international reputation
and raised concerns about corruption and governance in the country. This made it harder to
attract foreign investment and damaged Malaysia's standing in the global financial
community.

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ISSUES

a. Display how the application of creative accounting in the above scenario could have
eroded the reliability of the financial statements and discuss its connection to the
qualitative attributes of financial statements.

Creative accounting involves the manipulation of financial statements to present a more

favourable image of a company's financial health than is accurate. In the case of TechNova,
the application of creative accounting led to a complex web of deceit, resulting in devastating
consequences for investors and creditors. This section will explore in greater detail how
creative accounting eroded the reliability of TechNova's financial statements and its
connection to the qualitative attributes of financial statements as follows:

1. Aggressive Revenue Recognition

Alice, TechNova's charismatic CEO, engaged in aggressive revenue recognition, which is an

important aspect of creative accounting. She adjusted the date of revenue recognition, for
example, registering sales prematurely to enhance reported earnings. As financial
information is meant to be devoid of material inaccuracy and bias, this violated the
qualitative feature of reliability. The stated revenues did not accurately reflect the economic
substance of the transactions, creating a false picture of the company's true profitability.
TechNova, for example, reported sales for products that had not yet been delivered or
services that had not yet been finished, creating the illusion of healthy economic activity and
profitability.

2. Accounting Policy Changes and Lack of Transparency:

Alice orchestrated strategic accounting policy adjustments without clearly communicating

these changes to investors and creditors. This jeopardised the qualitative characteristics of
transparency and consistency. Financial statements should be transparent, allowing users to
understand the processes used consistently throughout time. The lack of openness in
accounting policy changes weakened the credibility and significance of the financial data
given. For example, TechNova switched from a straight-line to an accelerated depreciation
method without sufficiently explaining the impact on reported profits, resulting in an inflated
bottom line.

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3. Impact on Financial Statement Users

Creative accounting had a significant impact on financial statement users, notably investors
and creditors. The financial statements fell short of their position as a trustworthy source of
information for decision-making. When the true financial picture surfaced, investors who
depended on the reported great financial results incurred considerable losses. Creditors
faced significant losses since the company's capacity to repay loans was compromised. For
example, investors who purchased TechNova shares based on faked financials suffered
significant losses when the company's true financial status was revealed, undermining their
belief in the credibility of financial statements.

4. Regulatory Investigations and Market Trust

The impact from TechNova's creative accounting resulted in regulatory probes, emphasising
the need of regulatory compliance as a qualitative attribute. The trust of investors and
creditors in financial reporting has been eroded, threatening the financial markets' general
integrity. The event serves as a cautionary tale about the significance of maintaining financial
reporting integrity in order to preserve trust in the financial markets. Regulatory authorities,
for example, intervened, beginning investigations into TechNova's accounting procedures,
disclosing the magnitude of the financial fraud and contributing to a loss of confidence in the
larger financial markets.

5. Shifting Debts and Hidden Liabilities

The impact from TechNova's creative accounting resulted in regulatory probes, emphasising
the need of regulatory compliance as a qualitative attribute. The trust of investors and
creditors in financial reporting has been eroded, threatening the financial markets' general
integrity. The event serves as a cautionary tale about the significance of maintaining financial
reporting integrity in order to preserve trust in the financial markets. Regulatory authorities,
for example, intervened, beginning investigations into TechNova's accounting procedures,
disclosing the magnitude of the financial fraud and contributing to a loss of confidence in the
larger financial markets.

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6. Long-term Effects on Market Integrity

TechNova's innovative accounting has long-term consequences that went beyond the
immediate financial losses. The erosion of faith in financial reporting had a knock-on effect,
undermining the credibility of the financial markets as a whole. After being burned by one
company's dishonest activities, investors and creditors grew more wary and risk-averse,
influencing market dynamics and capital allocation. For example, the TechNova controversy
triggered heightened attention and regulatory monitoring in the market, resulting in increased
inspection of other companies' financial operations.

In conclusion, the TechNova tale is a detailed case study of the intricate layers of creative
accounting and their far-reaching implications. The aggressive revenue recognition, lack of
transparency, hidden liabilities, and subsequent consequences not only resulted in financial
losses for stakeholders, but also had a long-term impact on investor confidence in financial
markets. This comprehensive analysis emphasises the importance of organisations
upholding the integrity of financial reporting, emphasising openness, dependability, and
regulatory compliance to protect the interests of investors and creditors. The lessons from
TechNova serve as a sharp reminder of the need for ethical financial practices in maintaining
financial markets' general integrity and efficiency.

b. Construct potential incentives, as indicated in the above case, that could have driven
the adoption of creative accounting practices.

In the TechNova case, the adoption of creative accounting practices was driven by a lot of
incentives, weaving a complex narrative that resulted in devastating consequences. At the
forefront of these practices was aggressive revenue recognition, a manipulation tactic
directed by the CEO, Alice. Her motivation was rooted in the desire to artificially boost
TechNova's stock price, aligning with her personal interests and the aim of enhancing
shareholder value. Additionally, the connection of executive compensation to financial
measures provided an additional motivation for Alice to manipulate revenue figures, as this
could trigger performance-based bonuses. Top-management is usually most interested in
making the company's management look better than it is. It is the middle and senior
management who are most susceptible to creative accounting activities. According to a
Lynch study, 64% of the fraud involved the CEO, CFO or company founder (Cugova & Cúg,
2020).

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A second aspect of creative accounting in TechNova involved strategic changes in
accounting policies, as well as a lack of transparent communication about these changes.
This was driven by short-term goals, where Alice sought to generate immediate profitability.
By making these changes discreetly, she could attract investors and potentially meet
performance targets without the immediate review that transparent disclosures might bring.
The lack of transparency in communicating these changes also allowed for a delay in
potential negative market reactions, thereby maintaining the appearance of financial stability
in the short term.

The impact on financial statement users, particularly investors and creditors, became a
pivotal incentive in the adoption of creative accounting. The overarching goal was to
maintain investor confidence, and this was achieved through the presentation of a positive
image of TechNova's financial health. This not only ensured ongoing financial support but
also served to avoid triggering loan covenants, preventing potential financial penalties or
restrictions on borrowing. Companies often borrow money, for which loan contacts are
concluded. Most of the time in these contracts there are clauses that imply the stability of
some economic and financial indicators or results that, once violated, bring the company into
the situation of paying penalties or even immediately reimbursing the credit. By maintaining
contractual parameters within the limits, using creative accounting when it is not otherwise
possible, managers keep the company away from possible penalties or even more severe
cases of economic destabilization caused by reimbursement of a loan before the deadline
set by contract (Catalina,2017).

Furthermore, regulatory considerations played a significant role in driving the adoption of

creative accounting practices. The incentive here was to avoid regulatory scrutiny, and Alice
may have perceived that engaging in deceptive practices would deter investigations and
protect TechNova from reputational damage. Shifting debts to non-visible subsidiaries was a
tactical move to not only maintain compliance with debt covenants but also to attract new
investments by presenting a cleaner balance sheet.

Lastly, the long-term effects on market integrity were influenced by the incentive to shape
market perception positively. Alice, and possibly the company as a whole, may have
believed that maintaining the illusion of financial stability through creative accounting was not
only crucial for attracting long-term investors but also for ensuring the sustained growth and
survival of TechNova. These interconnected incentives highlight the complex relationship of
personal, organisational, and market-driven forces that encouraged the adoption of creative
accounting in the TechNova case, resulting in a web of deception with significant effects.

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DISCUSSIONS

a. Display the specific accounting practices and techniques Alice employed to

manipulate TechNova's financial statements.

Alice, the CEO of TechNova, used a variety of manipulative accounting practices to present
a misleading picture of the company’s financial health. One of the key techniques she used
was Aggressive revenue recognition.It is a form of financial statement manipulation,
involving recording revenues prematurely to overstate the company's financial performance.
This can be done by recording revenue prior to completing all services, prior to product
shipment, or for products that are not required to be purchased (Adkins, 2021). By doing
this, Alice was able to inflate TechNova’s apparent revenue, making the company seem
more profitable than it actually was.

Another technique Alice used was deferring expenses. This involves recording expenses
when they are incurred rather than when they are paid for. By deferring expenses, Alice was
able to reduce TechNova’s apparent expenses, further inflating its apparent profitability (CFI
Team,2023). Alice also shifted debts to subsidiaries that were not visible in the company’s
public financial reports. This practice, known as debt shifting, reduces a company’s apparent
liabilities, making it seem less risky than it actually is.

In addition to these techniques, Alice manipulated off-balance-sheet financing items. This

can involve a variety of practices, such as leasing or securitization, which can hide liabilities
and make a company seem less leveraged. Alice also changed accounting policies and
depreciation methods. These changes can alter the timing and amount of expenses,
affecting a company’s profitability. For example, by switching from a straight-line to a
declining balance method of depreciation, Alice could reduce the amount of depreciation
expense recorded in the early years of an asset’s life, thereby increasing TechNova’s
apparent profits. Alice also overestimated revenues by recording fictitious sales revenues.
This practice inflates apparent revenue, making the company seem more profitable.
Furthermore, Alice manipulated receivables write-offs. This practice can inflate apparent
assets, making the company seem more valuable. Finally, Alice manipulated accruals. This
practice can alter the timing and amount of expenses and revenues, affecting profitability.
For example, by delaying the recognition of an expense, Alice could increase TechNova’s
apparent profits in the short term.

These manipulative practices distorted TechNova’s financial statements, presenting a false

picture of the company’s financial health to investors and creditors. The fallout from these

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practices was devastating, with many investors losing their life savings and creditors facing
the risk of substantial losses. The impact also damaged trust in the financial markets. It’s a
stark reminder of the importance of transparency and integrity in financial reporting.

b. Construct an analysis of how creative accounting affects a range of stakeholders,

such as investors, creditors, employees, and regulators. Discussion should extend
beyond the impacts identified in the above case.

Creative accounting, as illustrated in the case of TechNova, can have wide-ranging and
detrimental effects on various stakeholders. Beyond the evident impacts highlighted in the
case, here's a more detailed analysis of how creative accounting affects different groups.
Let's start with how creative accounting affects investors. Investors rely on accurate financial
information to make informed investment decisions. Creative accounting distorts financial
statements, leading investors to allocate their capital based on false or manipulated data.
This misallocation can result in substantial financial losses when the truth is revealed. The
case illustrates how investors in TechNova suffered significant financial losses when the true
financial picture was revealed. The inflated stock prices, driven by aggressive revenue
recognition and accounting policy changes, resulted in a sharp decline in the stock value.

Besides that, the investors will lose confidence and credibility. When creative accounting
practices are exposed, investors experience a loss of confidence in the company and,
potentially, in the broader financial markets. This erosion of confidence can impact investors'
willingness to engage in future investments, especially in companies with charismatic
leadership that may conceal underlying financial issues.(Demerens,2013) The charismatic
CEO, Alice, and TechNova's promises of revolutionary products created a facade that
attracted investors. When the truth emerged, it eroded trust in the company and the broader
financial markets. Furthermore, creative accounting, as seen in the case of TechNova, can
artificially inflate a company's stock price. Investors who buy into the illusion of high valuation
may experience significant losses when the stock corrects to its true value, leading to market
distortions and a misrepresentation of the company's actual worth.

On the creditor’s view, creative accounting will increase risk of loan defaults. Creditors rely
on accurate financial information to assess the creditworthiness of a borrowing company.
Creative accounting practices, as illustrated in the TechNova case, can distort financial
statements, leading creditors to make lending decisions based on false information. This
increases the risk of loan defaults when the true financial picture is revealed. Creditors,

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eager to be part of TechNova's success story, extended substantial funds based on
manipulated financial information. When the deceptive accounting practices were
uncovered, creditors faced the risk of substantial losses as the company's true financial
health was revealed to be less robust than portrayed.

Moreover, creditors will issue legal consequences. Creditors may explore legal avenues to
recover their losses in the aftermath of creative accounting revelations. This could involve
legal battles to enforce contractual obligations or seek compensation for damages resulting
from the borrower's fraudulent financial practices. Creditors, feeling deceived by TechNova's
financial manipulations, may act as plaintiffs in legal proceedings. They could argue that the
company's deceptive practices misled them in their decision to extend credit and seek
restitution for the financial losses incurred due to the subsequent decline in the company's
financial health and stock value. In the case of Enron in the early 2000s, creditors and
investors of Enron did take legal actions against the company and its executives. The
scandal involved accounting fraud and the manipulation of financial statements to hide the
company's financial losses. When the truth emerged, Enron filed for bankruptcy in 2001, and
numerous lawsuits were filed against the company's executives, including CEO Jeffrey
Skilling and Chairman Kenneth Lay. (Petrick,2003)

Let's move to the employees side, creative accounting will affect job security and financial
impact. The revelation of creative accounting practices at TechNova suggests that the
company's reported financial success was unsustainable. As a result, employees may face
job losses due to the company's deteriorating financial health and potential downsizing or
restructuring efforts. The consequences of job losses may not be uniform across all
employee groups. Lower-level employees might be more vulnerable to layoffs, while
executives involved in the deceptive practices, like Alice, may also face termination or legal
consequences. Employees who were part of the TechNova success story may have received
stock options or invested in the company through retirement plans. As the stock prices
plummet following the revelation of creative accounting, the value of these stock options
decreases, leading to financial losses for employees who held them. Companies often tie
bonuses and other forms of compensation to financial performance. If the reported profits
and success were based on creative accounting rather than genuine financial strength,
employees might see a reduction in bonuses or other performance-related compensation.
(Li,2017) Employees, especially those who trusted in the company's vision and invested in
its success, may face unforeseen financial strain. Job losses combined with reduced stock
values can result in a sudden and impactful financial burden for individuals who may not
have anticipated such challenges.

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Besides that, the employees will have long term career implications. Employees associated
with a company involved in financial scandals, such as the deceptive accounting practices at
TechNova, may suffer from reputation damage. This damage is not limited to their time at
TechNova but can follow them throughout their careers. Professionals in roles directly
related to finance, accounting, or leadership may face heightened scrutiny. Employees
seeking new opportunities in the job market may encounter challenges. Prospective
employers may view candidates with ties to a company involved in financial misconduct as
potentially risky hires. The tarnished reputation of TechNova could negatively impact the
marketability of its former employees.

Career advancement also may be hampered for employees who were part of TechNova
during the period of financial deception. The association with a company known for unethical
financial practices might limit their opportunities for promotions, leadership roles, or positions
of greater responsibility in the future. In the case of Tyco International, employees at Tyco
did suffer from the consequences of creative accounting practices that were part of the
larger corporate scandal. The financial misconduct at Tyco, led by top executives including
CEO Dennis Kozlowski, involved various forms of financial manipulation and creative
accounting to inflate the company's profits and hide its true financial condition. The
repercussions for employees were substantial like job losses, financial impact and reputation
damage. (Enobong,2017)

On the regulators view, creative accounting will affect market integrity and credibility. The
exposure of creative accounting practices at TechNova likely led to a significant erosion of
trust among investors. Regulators play a crucial role in restoring market confidence by
addressing the root causes of the financial misconduct and taking corrective actions to
prevent similar occurrences. Regulators need to communicate effectively with the public,
investors, and other stakeholders about the actions taken to rectify the situation.

Transparency in the regulatory process helps rebuild trust and assures market participants
that appropriate measures are being implemented. The TechNova case prompts regulators
to review their own oversight mechanisms. If the deceptive accounting practices went
undetected for an extended period, it raises questions about the effectiveness of the existing
regulatory framework. Regulators must identify any gaps or weaknesses and take steps to
enhance their ability to detect and prevent such misconduct. Regulators may consider
updating their policies and procedures to keep pace with evolving business practices and
financial instruments. This could involve revising accounting standards, audit requirements,

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and disclosure regulations to ensure they remain robust and effective in preventing
deceptive financial practices.

c. In what ways did the fallout from TechNova's creative accounting practices mix with
broader issues in the financial markets, leading to a loss of trust among investors and
creditors?

The revelation of TechNova's creative accounting practices shattered the trust that investors
had placed in the company's reported financial success. Investors who had believed in the
company's charismatic leadership and promising growth story now faced the reality that the
financial success was artificially inflated. Investors began questioning their own due
diligence processes and the reliability of financial information provided by companies. The
TechNova case highlighted the challenges investors face in discerning between genuine
success and deceptive practices, leading to a more cautious and skeptical investor
community. The long-term impact of the TechNova case on investor confidence had
repercussions on market dynamics. Investors, wary of deceptive practices, became more
discerning in their investment decisions, influencing how capital flowed within the markets
and reshaping the landscape of investor preferences.

Besides that, TechNova's creative accounting practices exposed a significant gap between
the reported financial health and the actual financial condition of the company. Prior to the
revelation, creditors had relied on financial statements that portrayed a healthier picture than
reality. The exposure of the true financial health indicated that TechNova might have been
relying on deceptive practices to mask financial weaknesses, leading creditors to question
the accuracy of the information they had used to assess the company's creditworthiness.
Faced with the uncertainties surrounding TechNova's financial practices, creditors became
more cautious and reluctant to extend credit. The risk associated with lending to companies
engaged in deceptive accounting practices became more apparent, prompting creditors to
reevaluate their lending strategies. The TechNova case acted as a warning signal to
creditors, urging them to exercise greater prudence in extending credit and scrutinising the
financial health of borrowing companies more thoroughly.

Creditors sought reassurances from borrowing companies regarding the integrity of their
financial reporting. This included requests for additional documentation, third-party audits,
and more frequent and detailed financial updates. Borrowing companies had to work harder
to rebuild trust and provide the necessary assurances to creditors, demonstrating that they
were committed to transparent financial practices and ethical reporting.

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Also, another significant impact was the increased regulatory scrutiny of financial markets
and accounting practices. This heightened focus on compliance and transparency made
companies more cautious about their financial reporting, as they were aware of the potential
consequences of non-compliance. Additionally, the increased regulatory scrutiny resulted in
harsher penalties for companies and individuals involved in creative accounting practices,
making it clear that such practices would not be tolerated. As a result, companies began to
focus more on compliance with accounting standards and regulations, leading to better
financial reporting and reduced likelihood of creative accounting practices. This regulatory
crackdown not only aimed to prevent future scandals and restore investor confidence but
also contributed to a more risk-averse approach by investors and creditors, further impacting
the overall financial markets and leading to a loss of trust among market
participants.(Rahman et al., 2023)

Lastly, when TechNova engages in deceptive accounting practices, it can have a detrimental
effect on the credibility of financial reports. This, in turn, can impact the stability of financial
institutions and the broader economy. For example, if investors and creditors lose trust in the
accuracy of financial reports, they may be less willing to invest or lend money, leading to a
decrease in capital flows. This can result in a credit crunch, where companies are unable to
access the funds they need to operate and grow. Additionally, if the true financial picture of a
company is not accurately reflected in its financial reports, it can lead to misallocation of
resources and investment decisions based on false information. This can have a ripple effect
throughout the economy, leading to market volatility and potentially even a recession.
Therefore, the impact of creative accounting practices on financial stability is a significant
concern for regulators and policymakers. (Okoye & Obioma, 2020)

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CONCLUSION

What fixes or corrective actions can be implemented to prevent such creative

accounting practices from happening again in the future?

Preventing creative accounting and elaborate financial scams like the 1MDB scandal
requires a multi-pronged approach targeting both regulatory frameworks and corporate
culture. Here are some potential fixes and corrective actions:

1. Strengthening the Regulatory Framework:

Independent Auditing: Enhance the independence and authority of auditors by bolstering
audit standards, increasing whistleblower protection, and ensuring auditors are not beholden
to the entities they audit. Clearer Accounting Standards: Tighten regulations and accounting
standards, specifically targeting areas vulnerable to manipulation like asset valuation,
off-balance sheet entities, and revenue recognition. Increased Penalties: Introduce stricter
penalties for companies and individuals involved in financial malpractices, including hefty
fines, criminal charges, and debarment from financial markets. International Cooperation:
Foster greater international cooperation and regulatory harmonisation to prevent
cross-border scams and ensure coordinated investigative efforts.

2. Promoting Transparency and Ethical Practices:

Corporate Governance Reforms: Implement mandatory corporate governance reforms to
ensure transparency, accountability, and independent oversight within companies.
Whistleblower Protection: Establish strong whistleblower protection mechanisms to
encourage employees to report suspicious activities without fear of retribution. Enhanced
Disclosure Requirements: Mandate stricter disclosure requirements for complex financial
instruments, off-balance sheet entities, and potential conflicts of interest. Investor Education:
Raise awareness among investors about the risks of creative accounting and empower them
to ask critical questions and demand transparency from companies they invest in.

3. Technological Advancements:
Data Analytics and AI: Utilise advanced data analytics and artificial intelligence tools to
detect anomalies and patterns in financial data, potentially revealing hidden discrepancies.
Blockchain Technology: Explore the potential of blockchain technology to enhance
transparency and security in financial transactions, making it more difficult to manipulate
records.

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4. Cultural Shift:
Emphasis on Ethical Leadership: Promote a culture of ethical leadership within companies,
emphasising integrity, transparency, and long-term value creation over short-term gains.
Accountability at All Levels: Cultivate a culture of accountability within organisations, where
all stakeholders, from executives to employees, are held responsible for ethical conduct.
Continuous Education and Training: Provide ongoing education and training for financial
professionals and corporate executives on ethical practices, risk management, and
identifying red flags of potential malpractices.
Implementing these fixes and corrective actions requires a sustained effort from various
stakeholders, including regulators, governments, corporations, investors, and individuals.
While no single measure can guarantee foolproof prevention, a combination of these
approaches can significantly reduce the risk of creative accounting and financial scams,
building a more transparent and ethical financial system for the future.

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