ISA and Creative Accounting Practices: Current Developments and Ongoing Challenges
DOI:
https://doi.org/10.56830/IJAMS10202506Keywords:
Auditing Standards, Creative Accounting Practices, Professional Ethics, GovernanceAbstract
Purpose of the Study: The current study aims to examine and analyze current developments in international auditing standards considering the increasing application of creative accounting practices in listed companies. Therefore, the current study critically discusses the motives, methods, repercussions, and potential mitigating mechanisms. It also reviews some of the most controversial accounting scandals in the world.
Methodology: Creative accounting is a global problem, negatively impacting financial statements in every country. To achieve the objective of the current analytical study, five questions were formulated to answer the roots, motives, and methods of creative accounting; to clarify the effects of creative accounting practices on financial statements and stakeholders; to discuss the position of audit researchers on creative accounting practices; and to analyze and evaluate the position of international professional organizations on current developments in international auditing standards and their role in curtailing creative accounting practices.
Results: The study confirmed that there is an unreasonable, dishonest, and excessive use of creative accounting practices in companies, which has led to the downfall of many prominent companies worldwide. Many more will fall in the same direction, because the real problem with creative accounting practices lies in management's behavior and motives, and their use of their right to choose accounting policies and make accounting estimates. International professional organizations have also emphasized in all their publications that the responsibility for preventing creative accounting practices (fraud without embezzlement, manipulation, and misleading) or earnings management falls on management, those charged with governance, the board of directors, and all company employees. These stakeholders have been emphasized in their efforts to prevent this. Accordingly, the auditor's role in detecting creative accounting practices has been expanded by evaluating four important areas, including revenue recognition, changes in accounting policies, changes in accounting estimates, and unusual items, considering the application of international auditing standards.
Recommendations: Despite the development of auditors' duties and responsibilities through international auditing standards, it is not possible to completely limit the impact of creative accounting practices, because management is the main player by virtue of its responsibility. However, accounting and auditing standards need to be simplified, as they have become more complex considering evolving economic events and activities, financial crises, and investor pressure. Therefore, management ethics play an important role, as do the ethics of the accounting profession. However, perhaps more important is enforcing the law or regulation and creating more effective corporate governance practices to limit the phenomenon of creative accounting in listed companies. Overall, the research contributes to a deeper understanding of the challenges and opportunities associated with creative accounting practices, which guides stakeholders in dealing effectively with this dynamic landscape.
Future Studies: Within the framework of the development of international auditing standards to limit creative accounting practices, the study proposes for researchers and academics to examine the impact of auditor report content developments on the informational value (credibility) of the auditing profession; the impact of expanding auditor professional responsibilities on audit fees; the relationship between creative accounting practices and company/audit failure; the relationship between creative accounting practices and auditor change; and the impact of professional ethics on detecting creative accounting practices. Finally, the researcher hopes to conduct a field study examining the impact of current developments in international auditing standards on limiting creative accounting practices in the business environment in the Arab world, God willing.
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