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Citrayudha Komaladi
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David Song
Friday, February 06, 2009 8:16 AM
Heng Cheng Chiang Eddie; Nick Lim; Citrayudha Komaladi;
Tham Hoe Ming
Goh Kheng Leng
RE: [Spam] February 2009 Newsletter

Hi everyone,
Please read the article below on creative accounting. Thanks.

Peter Williams
Accounting: Feeling exposed
Financial Director, 26 Jan 2009

Creative accounting wont have anywhere to hide nor will the companies it sustained in the good times.
As the tide of prosperity recedes further out of sight, previously submerged wrecks can no longer remain
hidden. One of the most pernicious of those wrecks is creative accounting. It was recently possible, for a
moment, to believe the era of creative accounting was over. However, that expectation, or hope, now
seems set to be disappointed. With our global economic system, we are now more likely than ever to see
cross-border accounting scandals emerging over the next 18 to 24 months. Indeed, a couple have already
appeared; the Madoff collapse in the US and the eye-wateringly astonishing tale of Indian outsourcing
giant Satyam are bound to be front of a queue of what will surely be a long line of business and
investment frauds.
The benign conditions of the last few reporting seasons have altered dramatically now and the prevailing
conditions may expose companies that have made accounting errors. These come about in two ways:
either the data the company has been working off is erroneous, or accounting standards have been
misunderstood and therefore accounting polices have been misapplied. It has long been accepted that the
introduction of IFRS presented the perfect excuse for accounting cock-ups to take residence, even
allowing for the presence of auditors confirming that all is well. How many mistakes and how serious are
complete unknowns.
The second major ingredient that could plunge us into a creative accounting crisis is the desire for
management to keep the numbers looking healthy, either because they want to hit targets to trigger
bonus payments, or to make the numbers read a certain way. This creative accounting is a two-way
street: while some may want the figures to look as good as possible, others may have perfectly valid
reasons for deciding they look as terrible as possible. If you are going to make a loss, you may as well
make a massive one. But with so much bad news expected in 2009, your biggest-ever corporate loss may
well go unnoticed. Nevertheless, the advantage of exaggerating the bad news is that when things get
better, it can start to look a lot better.
At the beginning of the year, fund manager Schroders announced it was screening European companies
for imprudent accounting practices. It claimed that the good times led some companies into aggressive
accounting practices which may become apparent and unsustainable in a downturn. This, says Schroders,
will lead to accounting revisions and a collapse in confidence in individual companies. The action of
Schroders is reminiscent of the dots used to such devastating purpose by Terry Smith in his early 1990s
book, Accounting for Growth. For reasons of competitive advantage, Schroders is shy about revealing
what it is looking for, but it is looking at big movements in items on the balance sheet, such as other
current assets and a lack of correlation over the long-term between net income and cash generated.
The auditing profession, or at least its regulator the Financial Reporting Council, seems to be in agreement
with Schroders over the creative accounting risk and determined to learn from the accounting professions
mistakes in this regard. It sent a warning to auditors to watch for finance directors pushing the boundaries
of creative accounting too far. In the US, the Securities and Exchange Commission smarting from the
Madoff affair has made crystal clear it is ready to take on anyone it can find who steps out of line.
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It still points out the fact that it charged Fannie Mae and Freddie Mac with accounting fraud in 2006 and
2007 respectively and that both paid more than $450m in penalties to settle the charges.
Few will become embroiled in such schemes. For the majority of FDs, the greatest danger lies in the
inevitable grey areas. Who could blame FDs for pushing boundaries and for testing if their auditor is up to
the job of spotting the odd little stroke pulled? One FD I spoke to recently admitted he would be looking
for what he labelled innovative solutions. In particular, he will be taking a very careful look at the
technical definition of debt. Imaginatively exploring precise definitions of cash, working capital and
liquidity is important, not only because of external reporting requirements but in a bid to stay within ratios
set out in loan and banking agreements.
I
f there is flexibility, then FDs are going to make sure that any slack swings their way. As well as cash and
cash equivalents, they know the usual suspects that may be brought into play: revenue recognition, the
robustness of debtors, the completeness of liabilities, impairment and derivative accounting. FDs are
bound to go right to the edge. The hope has to be that not too many step over it but then, what is there
to stop them?
The weakness of the international process at the moment is the lack of an enforcement arm. This
magazine has previously called for the international equivalent of the Financial Reporting Review Panel
(FRRP). With creative accounting set to undermine global confidence in corporate reporting, such a body
now seems more urgent than ever and just as unlikely.

David Song
Senior Executive - Internal Audit
NTUC Income
DID/Fax: 68773420
www.income.com.sg
Make Insurance Make A Difference

Please be informed that with effect from 1 October 2008, my new email address is
david.song@income.com.sg

From: Goh Kheng Leng

Sent: Thursday, February 05, 2009 3:54 PM
To: David Song
Cc: Heng Cheng Chiang Eddie; Nick Lim; Citrayudha Komaladi; Tham Hoe Ming
Subject: FW: [Spam] February 2009 Newsletter

Please check out the articles on creative accounting below and circulate to all of us for
reading. It is a relevant risk in todays environment.
Goh Kheng Leng
Head Internal Audit
NTUC Income
DID:65-68773460
www.income.com.sg
Make Insurance Make A Difference
(From 1 October 2008, my email address is khengleng.goh@income.com.sg)

From: Oversight Systems [mailto:Oversight_Systems@mail.vresp.com]

Sent: Thursday, February 05, 2009 12:09 PM
5/25/2010 10:00 AM

Page 3 of 4

To: Goh Kheng Leng

Subject: [Spam] February 2009 Newsletter

February 2009

Automated Continuous
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Creative Accounting Likely to Surface in Economic Low-Tide

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