Reference no: EM132675571

Question - Flexibilities Versus Fraud

An often-repeated accounting story concerns three CPAs interviewing for an important position. The CPAs are asked one key question: "What's 2 plus 2?" The first candidate answers, "It's 4," and is told, "Don't call us, we'll call you." The second candidate answers, "Well, most of the time the answer is 4, but sometimes it's 3 and sometimes it's 5." The third candidate answers, "What do you want the answer to be?" Guess who gets the job.

The point is that GAAP are not cut-and-dried. Many accounting standards leave a lot of room for interpretation. Guidelines would be a better word to describe many accounting rules. Sometimes, a business may resort to what's called creative accounting to make profit for the period look better, or to record profit instead of a loss. This is like making a silk purse out of a sow's ear. Like lawyers who know where to find loopholes, accountants sometimes come up with inventive solution - creative accounting techniques - One is called "Massaging the numbers"; and the other is called "Cooking the books".

Which is right or wrong? Or which is more wrong than the other? What is the ethical and legal implication of these two practices?