Review

Reviewed Work(s): Creative Accounting, Fraud and International Accounting Scandals by

MICHAEL JONES
Review by: HERVÉ STOLOWY and HERVÈ STOLOWY
Source: The Accounting Review, Vol. 87, No. 3 (MAY 2012), pp. 1087-1091
Published by: American Accounting Association
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THE ACCOUNTING REVIEW American Accounting Association
Vol. 87, No. 3 DOI: 10.2308/accr-10244
2012
pp. 1087-1098

Book Reviews
Stephen A. Zeff, Editor

Editor's note: Two copies of books for review should be sent to the Book Revie
Editor: Stephen A. Zeff, Rice University, Jesse H. Jones Graduate School of Business,
6100 Main St., Houston, TX 77005. The policy of The Accounting Review is to publis
only those reviews solicited by the Book Review Editor. Unsolicited reviews will not
be accepted.

MICHAEL JONES (editor), Creative Accounting, Fraud and International Acco

Scandals (Chichester, West Sussex, England: John Wiley & Sons, 2011, ISBN: 9
470-05765-0, pp. xxv, 550).

As stated by the editor, "The basic motivation for this book is to explore the role of acc
particularly creative accounting and fraud, in accounting scandals across different countries" (p. xxi
thus a response to the wave of accounting scandals of the late 1990s and above all the early 2000s (En
WorldCom particularly). This book covers 58 high-profile accounting scandals across 12 coun
discusses many other cases of creative accounting and fraud.
The book is divided into three broad sections comprising 23 chapters in all. The first, seven-chapte
was entirely written by the editor, and explores "the basic themes which underpin the book" (p.
Introduction—Setting the scene, (2) The creative accounting and fraud environment, (3) Motivations t
in creative accounting and fraud, (4) Methods of creative accounting and fraud, (5) Evidence fo
accounting and fraud, (6) Impression management, and (7) Taking the long view: Accounting scandals o
The second section has 13 chapters, 12 focusing on a specific country and one on a specific
Individual authors analyze major accounting scandals and instances of creative accounting that have o
since the 1980s in their own country. The countries are: Australia (Garry D. Carnegie and Br
O'Connell), China (Catherine Huirong Chen, Yuanyuan Hu, and Jason Zezhong Xiao), Germany (H
Lenz), Greece (George Kontos, Maria Krambia-Kapardis, and Nikolaos Milonas), India (Bhabatosh
Italy (Andrea Melis), Japan (Kazuyuki Suda), The Netherlands (Henk Langendijk), Spain (Nieves C
Sweden (Gunnar Rimmel and Kristina Jonall), the U.K. (David Gwilliam and Richard H.G. Jackson
U.S. (Charles W. Mulford and Eugene E. Comiskey). The sector-specific chapter is on banks (Simon D.
The book's third and final section looks at future prospects in three chapters, all written by the edit
Identifying some themes, (22) The impact of accounting scandals and creative accounting,
Conclusion: Looking backwards and forwards.
Two very interesting appendices close the book: (1) "Chronological list of major instances of acco
issues across 12 countries and beyond," and (2) "Alphabetical list of most important accounting
across 12 countries and beyond since about 1980."
The book is well written, very readable, and relatively consistent in tone, considering it is the c
work of a large number of authors (22 contributors in all). It addresses the "fashionable" theme of ac
scandals, which, paradoxically, has not been the subject of many books. It also has a second theme, c
accounting, that achieved credibility through the works of Griffiths (1986) and Smith (1992), and h
lower profile recently. This makes the book particularly useful for instructors interested in in-depth
accounting scandals.
The book gets off to a strong start in the first chapter by "exploring the terms" in an exercise that
the title of the book seem surprising and, in my opinion, misleading. Why does that title include th

1087

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1088 Book Reviews

"international accounting," which is suggestive of the IASB's international accounting standards (IAS
international financial reporting standards (IFRS), when the cases described in the book actually have lit
no connection with "international accounting"? Based on the actual content of the book, a better title m
have been "Creative accounting and fraud: an international overview of accounting scandals" or "Cre
accounting and fraud: an international approach to accounting scandals."
The opening chapter makes a laudable attempt to define the key terms and distinguish between the cl
related terms of "creative accounting" and "fraud." Quite rightly, it refers to other terms often us
connection with creative accounting: aggressive accounting, earnings management, impression managem
and profit smoothing.
In figure 1.1 (pp. 6-7), the author presents an excellent summary of definitions of creative accounting
fraud. His preferred definition of creative accounting emphasizes earnings management and financial stat
presentation. Some discussion of the very meaning of the word "creative" would have been interesting.
is "creative" about earnings management? Surely nothing. The term "creative" accounting was invent
practitioners and journalists, some of whom had only just found out that there was some flexibility in fin
statement preparation. One rare case of true creativity relates to use of the (then) new standard SFA
Extinguishment of Debt, adopted in response to the financial community's growing interest (as observed
Exxon case) in the use of in-substance defeasance to remove debt from the balance sheet (Peterson et al.
This chapter makes hardly any reference to "big bath" accounting (which is covered later in the book
creative accounting and fraud technique; see Chapter 4, p. 49). While the author does cite Murph
Zimmerman (1993) and Pourciau (1993), two interesting articles on the big bath question, he could also
referred to the two seminal articles by Moore (1973) and Healy (1985) (who is cited in relation to b
maximization). Other articles on the big bath would also have been worth a mention (Walsh et al. 1
DeFond and Park 1997; Kirschenheiter and Melumad 2002).
The first chapter ends with an interesting table (Table 1.1, p. 15) showing the countries studied in
book, with the relevant contributors and major cases. This table raises questions about the choice of count
Of course, no book of this type can cover every location, but the absence of two countries such as Canad
France is surprising. Canada offers the examples of Nortel (distribution of corporate bonuses) (see H
2002) and Live Entertainment Corporation of Canada, Inc., also known as Livent (theater production com
in Toronto: aggressive capitalization of costs, revenue-generating agreements). French cases that the
could have covered include Marionnaud (selective distribution of perfumes and cosmetics: accounting fra
loyalty cards and gift vouchers) and Andre-Vivarte (shoe shops: aggressive accounting for provisions
reversal of provisions). With its focus on major concepts, Chapter 1 could have made greater reference to
(1996), cited only later in Chapter 4, who proposes the new concept of "creative compliance."
Chapter 2 gives an interesting definition of the actors concerned in creative accounting and fr
managers, investment analysts, regulators, auditors, shareholders, merchant banks, and legal authorities
Chapter 3, the author turns to the motivations driving people to indulge in creative accounting and f
illustrated by the enlightening Figure 3.1 (p. 33) and its list of incentives. But surprisingly, this chapter m
no reference to the fraud triangle, especially its "incentives" component, although SAS 99 (AICPA 2002)
ISA 240 (International Federation of Accountants [IFAC] 2009) have highly detailed appendices conta
examples of incentives.
Chapter 4 reviews a large number of creative accounting techniques. Its technical analysis is very cle
and absolutely necessary. Plainly, the author has opted for theoretical presentation of these techni
although a numerical example is provided at the end of the chapter. It might have been useful for the rea
have cross-references to the many well-documented real-life examples that are discussed in the follo
country-specific chapters, so that each accounting technique presented in this chapter would immediate
illustrated by a company name.
Chapter 5 presents the professional and academic literature on creative accounting and fraud. The first pa
of this chapter is mainly devoted to books on creative accounting (e.g.. Griffiths 1986; Smith 1992;
1994; Griffiths 1995). Schilit (2002) could have been included. The second part concerns statistical stu
chiefly academic studies. It cites Jones' model (Jones 1991) but makes no mention of the development to
model by Dechow et al. (1995). Academic studies of creative accounting are few and far between (such stu
tend to concentrate on earnings management and income smoothing), but the book does not cite the artic

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Book Reviews 1089

Pierce-Brown and Steele (1999) who conducted an empirical study of the companies named by Smith (1992)
in his famous book.
Chapter 6 deals with impression management. In my view, this is the most original, innovative chapter in
the first section, as impression management has hardly ever been covered in books on creative accounting. The
author divides it into two themes: accounting narratives ("stress the positive, downplay the negative," "baffle
the readers," "differential reporting," and "attribution") and graphs ("selectivity," "measurement distortion,"
"presentational enhancement," and "photographs"). Many practical examples are supplied as illustrations and
make this chapter an even more engaging read. For graphs, several other academic references are relevant
(Moriarity 1979; Stock and Watson 1984; Frownfelter-Lohrke and Fulkerson 2001; Dilla and Janvrin 2010).
The first section of the book ends with Chapter 7, which presents a historical overview of major scams and
scandals across time. The author certainly goes a long way back—the earliest example dates from the
Mesopotamian period (the cruciform monument).
As mentioned earlier, the second section comprises 13 chapters, 12 by country and one about banks. Each
of these chapters follows a broadly similar structure: a relatively brief description (one page on average) of a
few cases, followed by a much more detailed discussion of a "major" case (e.g., HIH Insurance in Australia,
Royal Ahold in The Netherlands, Enron and WorldCom in the U.S.). Most chapters end by considering the
consequences of the scandals (e.g., regulatory responses). The chapter on Australia is exemplary: all cases,
even the "minor" ones, are examined in a very clear-to-follow way under three headings: background,
accounting issues, and legal outcomes. In other chapters, only the in-depth cases are highly structured (e.g.,
Chapter 9 on China and Chapter 12 on India). For the reader, it would have been useful to have the same
structure as in the Australia chapter used explicitly for all cases in all chapters.
This second section is fascinating and packed with information, offering a perfect reflection of the value
of local expert knowledge. Among several very well-presented cases, one good example is the discussion of
Parmalat, in which the author answers an essential question: "Was it a case of creative accounting or of false
accounting?" (p. 260). Chapter 20 on the banking sector is very up-to-date, including the Lehman Brothers,
Madoff, and Bear Stearns cases. This chapter clearly explains the role of accounting in the financial crisis.
Chapter 21 rightly returns to the distinction between creative accounting and fraud, then looks at the
major methods used: increasing income, decreasing expenses, increasing assets, and decreasing liabilities. It
also addresses the problem of "overstrong personalities." This is surely a promising theme, and the links
between personality traits and fraud, or between psychology and fraud, have been examined in recent
publications (Cohen et al. 2010; Murphy and Dacin 2011).
In Chapter 22, which examines the impact of accounting scandals and creative accounting, Table 22.4 on
the regulatory consequences of accounting scandals gives a particularly useful summary of the national laws
and regulations enacted in the wake of each country's major scandals.
The concluding Chapter 23 raises several points for future consideration, with a particular pointer toward
ethics. The article by Gowthorpe and Amat (2005) could supplement the references provided by the author on
this issue.
In a number of ways, the book could perhaps have been structured better. Each chapter is currently
followed by its own list of references, and this has several drawbacks. Some references appear several times
because they are included in several different chapters; while not illogical, this makes it difficult to find a
particular reference, as it obliges the reader to consult each list. A single bibliography at the end of the book
would probably be a simpler solution. Another problem is that there is some repetition of methods between the
beginning of the book and the end (Chapter 23).
Regarding the book's intended readership, the editor states (p. xxiv) that it will be "ideal for the general
reader, professional accountant and businessman worldwide. It is also well suited for undergraduate students
taking courses in forensic accounting and fraud. It may also prove a useful supporting book on more general
accounting and finance courses. The book is uniquely positioned to support specialized MSc courses in
accounting and finance or MBA courses." While the theme of "accounting scandals and creative accounting"
is undeniably appealing to many students,1 after reading the book I feel that it could be beyond the grasp of
undergraduate students, because a significant technical knowledge is required to understand most of the

1 On November 1, 2002, after the Enron scandal, a survey of accounting professors published in the CPA Personnel
Report newsletter was entitled: "It's Hot! It's Sexy! It's ... Accounting."

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1090 Book Reviews

scandals. This book is, however, very well suited to Master's students in accounting who are interested in the
general theme of accounts manipulation (Stolowy and Breton 2004) (earnings management, income
smoothing, creative accounting, and accounting fraud) or other Master's students with a very good knowledge
of accounting basics.
Overall, this is a remarkable book, for we all know that coordinating a large team of contributors is a very
demanding task. In view of the theme addressed by the book and the editor's voluntarily international
perspective, the cooperative approach was absolutely necessary. The editor and his contributors have
succeeded in writing a book with a generally consistent tone, providing a large number of detailed examples,
and any reader, even a specialist in creative accounting and fraud, is very likely to learn something new from it
for the simple reason that it is practically impossible to be familiar with all of the world's accounting scandals.
Even the shortcomings highlighted earlier concerning the book's international scope must be put in
perspective, and they in no way detract from the quality of the chapters included (I naturally found it difficult to
ignore the fact that France, my home country, had been left out).
The book also tackles sensitive themes such as the boundary between creative accounting and fraud, and as
such could be a springboard for interesting discussions with our students at a time when many institutions are
keen to emphasize the concepts of ethics and corporate social responsibility in their teaching. Perhaps the
ultimate aim of a book of this kind is to avoid any more headlines like the notorious "From Harvard to Enron."2

REFERENCES

American Institute of Certified Public Accountants (AICPA). 2002. Consideration of Fraud in a Financial
Statement Audit. Statement on Auditing Standards (SAS) No. 99. New York, NY: AICPA.
Cohen, J., Y. Ding, C. Lesage, and H. Stolowy. 2010. Corporate fraud and managers' behavior: Evidence
from the press. Journal of Business Ethics 95 (Supplement 2): 271-315.
Dechow, P. M., R. G. Sloan, and A. P. Sweeney. 1995. Detecting earnings management. The Accounting
Review 70 (2): 193-225.
DeFond, M. L., and C. Park. 1997. Smoothing income in anticipation of future earnings. Journal of
Accounting and Economics 23 (2): 115-139.
Dilla, W. N., and D. J. Janvrin. 2010. Voluntary disclosure in annual reports: The association between
magnitude and direction of change in corporate financial performance and graph use. Accounting
Horizons 24 (2): 257-278.
Frownfelter-Lohrke, C., and C. L. Fulkerson. 2001. The incidence and quality of graphics in annual reports:
An international comparison. Journal of Business Communication 38 (3): 337-358.
Gowthorpe, C., and O. Amat. 2005. Creative accounting: Some ethical issues of macro- and micro
manipulation. Journal of Business Ethics 57 (1): 55-64.
Griffiths, I. 1986. Creative Accounting: Flow to Make Your Profits What You Want Them to Be. London,
U.K.: Sidgwick and Jackson.
Griffiths, I. 1995. New Creative Accounting. London, U.K.: Macmillan.
Healy, P. 1985. The effect of bonus schemes on accounting decisions. Journal of Accounting and
Economics 7 (1-3): 85-107.
Hunter, D. 2002. The Bubble and the Bear: How Nortel Burst the Canadian Dream. Toronto, Canada:
Doubleday Canada.
International Federation of Accountants (IFAC). 2009. International Standard on Auditing (ISA) 240
Revised: The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements.
Handbook of International Auditing, Assurance, and Ethics Pronouncements. New York, NY: IF AC.
Jones, J. J. 1991. Earnings management during import relief investigations. Journal of Accounting Research
29 (2): 193-228.

2 See, for example, the article by John LeBoutillier (Thursday, January 10, 2002, http://archive.newsmax.com/
archives/articles/2002/l/10/162639.shtml). The headline concerns Jeffrey Skilling, the former CEO of Enron.

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Book Reviews 1091

Kirschenheiter, M., and N. D. Melumad. 2002. Can "big bath" and earnings smoothing co-exist as
equilibrium financial reporting strategies? Journal of Accounting Research 40 (3): 761-796.
Moore, M. L. 1973. Management changes and discretionary accounting decisions. Journal of Accounting
Research 11 (1): 100-107.
Moriarity, S. 1979. Communicating financial information through multidimensional graphics. Journal of
Accounting Research 17 (1): 205-224.
Murphy, K. J., and J. L. Zimmerman. 1993. Financial performance surrounding CEO turnover. Journal of
Accounting and Economics 16 (1-3): 273-315.
Murphy, P., and M. Dacin. 2011. Psychological pathways to fraud: Understanding and preventing fraud in
organizations. Journal of Business Ethics 101 (4): 601-618.
Peterson, P., D. Peterson, and J. Ang. 1985. The extinguishment of debt through in-substance defeasance.
Financial Management 14 (1): 59-67.
Pierce-Brown, R., and T. Steele. 1999. The economics of accounting for growth. Accounting and Business
Research 29 (2): 157-173.
Pijper, T. 1994. Creative Accounting: The Effectiveness of Financial Reporting in the UK. London, U.K.:
Palgrave Macmillan.
Pourciau, S. 1993. Earnings management and nonroutine executive changes. Journal of Accounting and
Economics 16: 317-336.
Schilit, H. M. 2002. Financial Shenanigans: Flow to Detect Accounting Gimmicks and Fraud in Financi
Reports. 2nd Edition. New York, NY: McGraw-Hill.
Shah, A. K. 1996. Creative compliance in financial reporting. Accounting, Organizations and Society 2
(1): 23-39.
Smith, T. 1992. Accounting for Growth—Stripping the Camouflage From Company Accounts. 2nd Edit
1996. London, U.K.: Century Business.
Stock, D., and C. J. Watson. 1984. Human judgement accuracy, multidimensional graphics, and human
versus models. Journal of Accounting Research 22 (1): 192-206.
Stolowy, H., and G. Breton. 2004. Accounts manipulation: A literature review and proposed concept
framework. Review of Accounting and Finance 3(1): 5-65.
Walsh, P., R. Craig, and F. Clarke. 1991. "Big bath accounting" using extraordinary items adjustments
Australian empirical evidence. Journal of Business Finance and Accounting 18 (2): 173-189.

HERVE STOLOWY

Professor of Accounting
HEC Paris

CHRISTOPHER W. NOBES, Current Debates in International Accounting (Cheltenh

Glos, U.K.: Edward Elgar Publishing Limited, 2010, ISBN 10: 978-1-84844-838
pp. xv, 208).

The EFRSs have gained broad acceptance and are now applied by listed companies in approximately 120
countries around the world. The U.S. is moving toward the convergence of U.S. GAAP and IFRS. The
Securities and Exchange Commission's (SEC) roadmap suggests that the decision over the future adoption of
IFRS by U.S. companies should be made in due time. Thus, the world seems to be on the way to one single
accounting language. Against this backdrop, the subject of Christopher Nobes' book, Current Debates in
International Accounting, is both timely and relevant. Christopher Nobes is Professor of Accounting at Royal
Holloway, University of London and is an Adjunct Professor at the Norwegian School of Business, Oslo. From
1993 to 2001, he was a representative on the board of the International Accounting Standards Committee. The
book brings together his key articles on international accounting published in 11 different academic journals

l/\j American
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