Aggressive accounting is a business practice in which certain misstatements are made on balance sheets and in financial disclosures with the goal of making a company appear economically stable. Some of the tactics used in this type of accounting are explicitly illegal, while others skirt the boundary of legality, being legal in the technical sense but definitely not adhering to the spirit of traditional accounting practices. Also known as “creative” or “innovative” accounting, aggressive accounting has been a problem for centuries, but it became particularly problematic in the 20th century, when it contributed to a number of financial scandals.
The goal of accounting is to create a complete picture of a company's finances, and to track those finances effectively and honestly. However, there are a number of ways to manipulate accounting figures to cover up financial issues, or to artificially inflate the value of a company. The practice of aggressive accounting, also known as “cooking the books,” involves some machinations to present a desirable financial image.
There are several goals behind aggressive accounting. One is to inflate the stock value of a company, thereby generating more operating capital. Companies may justify the use of this type of accounting with the argument that it creates more capital, allowing the company to expand and strengthen, and that the accounting is simply optimistic, rather than an outright lie. It is also used to mollify shareholders, and can be used specifically to defraud people, in the case of a company which drives stock prices up with aggressive accounting before allowing select individuals to quietly sell off their stock.
It can be difficult to detect aggressive accounting. Shareholders are usually given annual or periodic statements discussing a company's income, expenses, and overall performance, but they don't have access to the company's books, which may have reveal interesting information when they are audited. Financial regulators may also be limited in the amount of auditing they can perform, which means that creative accounting may only be identified when a whistleblower comes forward.
This practice is viewed as harmful because it can inflate financial markets, exposing them to the risk of collapse. It also harms individuals who may be victimized when they invest in companies with aggressive accounting practices, and it can besmirch entire industries as well. A number of nations attempt to regulate accounting practices to make it more difficult to engage in creative accounting, and penalties for cooking the books can include fines and jail time for those involved.