There are several reasons why companies get involved in creative accounting and fraud. Firstly, there may be a need to create evidence that a firm is a great investment opportunity for stakeholders. If the company’s sales are lower than expected or liabilities have significantly increased, the business entity may be tempted to book more sales or fewer liabilities.
Secondly, some personal incentives may account for the use of creative accounting and fraud. If directors are subject to performance-related pay, they can report higher sales. Other personal motivations include shares and share options, which are provided to directors as remuneration. Therefore, they can be interested in maximizing the company’s profits since they will make the share price grow.
Thirdly, creative accounting and fraud may also be used by managers who are eager to get a higher position or save their place in a company.
Fourthly, firms may adopt creativity in their reporting practices to manage gearing and borrowing.
Fifthly, new companies that enter the market for the first time may use fraud or creative accounting to attract more investors and make the share price rise. Fraud and creative accounting can also be used by firms that are involved in mergers and acquisitions activity.