The term of creative accounting refers to select accounting methods for the preparation of financial statement that provide the result desired by the accounting preparers. Especially when the firms are under a financial difficulty, the need of creativity would be very apparent because it might be difficult for parties such as auditors, with an oversight function, to report that the account preparers are doing anything wrong (Deegan, 2010).
When the economy is moving into recession, the most companies are likely to manipulate their financial statement to be in the upward direction in order for the favourable profit by overstating the asset and understating the liability.
b) No, the roles and responsibilities of auditors and regulators are very vital at improving control. Auditors perform audits to evaluate whether the policies and process are designed and operating effectively and provide recommendations for improvement. They also help to monitor and evaluate the effectiveness of the organizations risk management processes.
They may prepare a comprehensive assessment of any wrong doing that might lead the organization into financial loss. As for the role of regulators, they will determine how best to cause firms subject to their jurisdiction to develop control policies and procedures to meet the performance objectives. In fact, auditors and regulators are part of the pillars of corporate governance. The auditors and regulators definitely work to predict the warning of the recession and give notification to the company.
However, they could not be in position to finish final decision and to control every improvement and process. Just like the HIH insurance case, the directors still make wrong decision, even if there was the concurrence of the actuaries and the auditors. It does not matter how efficiently they played their role, it matters how efficiently the four pillars which are boarder of directors, management, auditors and regulators could be harmonized with. In other word, this failure should not be the reason to reduce the roles of auditors and regulators.