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People take liberties wherever they go; with the language, rules, ethics, other people’s property; but before I got into business I had never heard of taking liberties with mathematics.
Creative Accounting, sometimes referred to as Earnings Management, is basically a way of lying through numbers. Kind of like statistics, but more theoretical.
Whereas in statistics you lie by making false correlations and playing with number ranges, in creative accounting you partition of segments of money and either add them or subtract them from other areas. The end result can range from slush funds to higher profit margins for shareholders; but it always stems from one fact: the company didn’t really earn as much or as little as they said they did.
So why is this an issue? Well it depends on how nit-picky you are. While the majority of “earning management” most likely falls under the small business category, with sole-proprietorships struggling to stay under the next tax bracket to put their kids through college; quite a few situations can end up becoming horrible scandals, like Enron. It’s important as a business owner that you stay abreast of these tactics, and as a person you have to decide how important you profit margin is in regards to using them.
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