Editing Creative accounting (section)

== Types/examples of creative accounting schemes ==

===Earnings management===
{{main|Earnings management}}
Creative accounting can be used to manage earnings.<ref>{{cite web|title=Creative Accounting|url=http://www.investopedia.com/terms/c/creative-accounting.asp|publisher=Investopedia|access-date=14 January 2014}}</ref> Earnings management occurs when [[Management|managers]] use judgment in [[financial reporting]] and in structuring transactions to alter financial reports to either mislead some [[Stakeholder (corporate)|stakeholder]]s about the underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers.<ref>Healy, P. M. and J. M. Wahlen. 'A review of the earnings management literature and its implications for standard setting', ''Accounting Horizons'', December 1999, pp. 365–383.</ref>

=== Hollywood accounting ===
{{Main articles|Hollywood accounting}}
Practiced by some Hollywood film studios, creative accounting can be used to conceal earnings of a film to distort the profit participation promised to certain participants of the film's earnings. Essentially, participants in the gross revenue of the film stay unaffected but profit participants are presented with a deflated or negative number on profitability, leading to less or no payments to them following a film's success. Famous examples of deceiving [[Good faith (law)|good faith]] profit participants involve [[Darth Vader]] actor [[David Prowse]] (with $729M adjusted gross earnings on ''[[Return of the Jedi]]'')<ref>{{Cite web|url=https://www.boxofficemojo.com/franchises/chart/?id=starwars.htm|title=Star Wars Movies at the Box Office |website=Box Office Mojo |access-date=2019-09-23}}</ref> and ''[[Forrest Gump]]'' novel writer [[Winston Groom]] (with $661M gross theatrical revenue)<ref name=":0">{{Cite web|url=https://www.latimes.com/archives/la-xpm-1995-05-24-mn-5473-story.html|title='Gump' a Smash but Still in the Red, Paramount Says: Movies: Writer, who is due to get 3% of net profits, hires lawyer to question the studio's accounting practices.|date=1995-05-24|website=Los Angeles Times|language=en-US|access-date=2019-09-23}}</ref>—both of whom have been paid $0 on their profit participation due to the films "being in the red".<ref>{{Cite web|url=http://priceonomics.com/why-do-all-hollywood-movies-lose-money/|title=Why Do All Hollywood Movies Lose Money?|website=Priceonomics|date=30 July 2013 |language=en|access-date=2019-09-23}}</ref><ref name=":0" />

=== Tobashi schemes ===
{{Main articles|Tobashi scheme}}
This form of creative accounting—now considered a criminal offense in Japan, where it originated—involves the sale, swap or other form of temporary trade of a liability of one company with another company within the holding's portfolio, often solely created to conceal losses of the first firm. These schemes were popular in the 1980s in Japan before the government instituted harsher civil laws and eventually criminalized the practice. The [[Enron scandal]] revealed that [[Enron]] had extensively made use of sub-corporations to offload debts and hide its true losses in a Tobashi fashion.

=== Lehman Brothers' Repo 105 scheme ===
{{Main articles|Repo 105}}
[[Lehman Brothers]] utilized [[Repurchase agreement|repurchase agreements]] to bolster profitability reports with their [[Repo 105]] scheme under the watch of the accounting firm [[Ernst & Young]]. The scheme consisted of mis-reporting a repurchase agreement (a promise to re-buy a liability or asset after selling it) as a sale, and timing it exactly in a way that half of the transaction was completed before a profitability reporting deadline, half after—hence bolstering profitability numbers on paper. Public prosecutors in New York filed suit against EY for allowing the "accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman's balance sheet in order to deceive the public about Lehman's true liquidity condition".<ref>{{Cite web|url=https://ag.ny.gov/press-release/2010/attorney-general-cuomo-sues-ernst-young-assisting-lehman-brothers-financial-fraud|title=Attorney General Cuomo Sues Ernst & Young For Assisting Lehman Brothers In Financial Fraud {{!}} New York State Attorney General|website=ag.ny.gov|date=21 December 2010 |access-date=2019-09-23}}</ref>

[[Enron]] had done exactly the same about 10 years earlier; in their case, [[Merrill Lynch]] aided Enron in bolstering profitability close to earnings periods by willfully entering repurchase agreements to [[Merrill Lynch|buy Nigerian barges from Enron]], only for Enron to buy them back a few months later. The [[U.S. Securities and Exchange Commission]] (SEC) filed charges and convicted multiple Merrill Lynch executives of aiding the fraud.<ref>{{Cite web|url=https://www.sec.gov/news/press/2003-32.htm|title=SEC Charges Merrill Lynch, Four Merrill Lynch Executives with Aiding and Abetting Enron Accounting Fraud|website=www.sec.gov|access-date=2019-09-28}}</ref>

=== Currency swap concealment of Greek debt by Goldman Sachs ===
{{See also|Goldman Sachs#Involvement in the European sovereign debt crisis}}
In 2001–2002, [[Goldman Sachs]] aided the government of [[Greece]] after its admission to the Eurozone to better its deficit numbers by conducting large [[Currency swap|currency swaps]]. These transactions, totaling more than 2.3 billion Euros,<ref>{{Cite news|url=https://www.reuters.com/article/goldman-sachs-greece-derivatives-idUSLDE61L1KH20100222|title=Goldman Sachs details 2001 Greek derivative trades|date=2010-02-22|work=Reuters|access-date=2019-09-23|language=en}}</ref> were technically [[Loan|loans]] but concealed as currency swaps in order to circumvent [[Maastricht Treaty]] rules on member nations deficit limits and allowed Greece to "hide" an effective 1 billion euro loan.<ref>{{Cite news|url=https://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html|title=Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask its True Debt|last=Balzli|first=Beat|date=2010-02-08|work=Spiegel Online|access-date=2019-09-23}}</ref> After Goldman Sachs had engineered the financial instrument and sold it to the Greeks—simply shifting the liabilities in the future and defrauding investors and the [[European Union]], the investment bank's president [[Gary Cohn (investment banker)|Gary Cohn]] pitched Athens another deal. After Greece refused the second deal, the firm sold its Greek swaps to the Greek national bank and made sure its [[Short (finance)|Short]] and [[Long (finance)|Long]] positions towards Greece were in balance—so that a potential Greek default would not affect Goldman Sachs.<ref>{{Cite web|url=https://www.businessinsider.com/goldman-sachs-shorted-greek-debt-after-it-arranged-those-shady-swaps-2010-2|title=Goldman Sachs Shorted Greek Debt After It Arranged Those Shady Swaps|website=Business Insider|access-date=2019-09-23}}</ref>

=== Parmalat's mis-accounted credit-linked notes ===
{{See also|Parmalat#Financial fraud (2002–2005)}}
Italian dairy giant [[Parmalat]] employed a number of creative accounting and wire fraud schemes before 2003 that lead to the largest bankruptcy in European history.<ref>{{Cite web|url=https://www.europeanceo.com/finance/europes-biggest-bankruptcy-remembered/|title=Europe's biggest bankruptcy remembered|website=www.europeanceo.com|language=en-US|access-date=2019-09-29}}</ref> It sold itself [[Credit-linked note|Credit-linked notes]] with the help of [[Merrill Lynch]] through a [[Cayman Islands]] [[special-purpose entity]] and over-accounted for their value on the balance sheet. It also forged a $3.9Bn check from [[Bank of America]].<ref>{{Cite web|url=https://www.marketwatch.com/story/parmalat-a-disaster-but-no-enron|title=Parmalat: A disaster, but no Enron|last=Goldstein|first=Steve|website=MarketWatch|language=en-US|access-date=2019-09-29}}</ref> The publicly listed company stated to investors that it had about $2Bn in liabilities (this figure was accepted by its auditors [[Deloitte]] and [[Grant Thornton International]]), but once audited more vigorously during the bankruptcy proceedings, it was discovered that the company's debt turned out to actually be $14.5Bn.<ref name=":2">{{Cite news|url=https://www.theguardian.com/business/2004/feb/17/corporatefraud.parmalat|title=Police net widens on Parmalat family|last1=Tran|first1=Mark|date=2004-02-17|work=The Guardian|access-date=2019-09-29|last2=agencies|language=en-GB|issn=0261-3077}}</ref> This massive debt was largely caused by failed operations in Latin America and increasingly complex financial instruments used to mask debt—such as Parmalat "billing itself" through a subsidiary called Epicurum.<ref>{{Cite book|url=https://books.google.com/books?id=94_sAgAAQBAJ&q=parmalat+largest+bankruptcy&pg=PA231|title=Governance and the Market for Corporate Control|last=Teall|first=John L.|date=2014-02-25|publisher=Routledge|isbn=978-1-317-83471-7|language=en}}</ref> It was also discovered that its CEO [[Calisto Tanzi]] had ordered the creation of shell accounts and diverted 900M Euros worth into his private travel company.<ref name=":2" />

=== Offshoring and tax avoidance ===
{{See also|Offshore financial centre|Offshore Leaks|Tax avoidance}}
In order to avoid taxes on profits, multinational corporations often make use of [[Offshore financial centre|offshore]] [[Subsidiary|subsidiaries]] in order to employ a creative accounting technique known as "Minimum-Profit Accounting". The subsidiary is created in a [[tax haven]]—often just as a shell company—then charges large fees to the primary corporation, effectively minimizing or wholly wiping out the profit of the main corporation. Within most parts of the [[European Union]] and the [[United States]], this practice is perfectly legal and often executed in plain sight or with explicit approval of tax regulators.<ref>{{Cite web|url=https://www.icij.org/investigations/paradise-papers/nikes-sweetheart-dutch-tax-deal-ignored-economic-reality-eu-says/|title=Nike's Sweetheart Dutch Tax Deal Ignored 'Economic Reality,' EU Says|website=ICIJ|date=8 July 2019 |language=en-US|access-date=2019-09-30}}</ref> 

[[Nike, Inc.]] famously employed offshoring by selling its [[Swoosh]] logo to a [[Bermuda]]-based [[special-purpose entity]] subsidiary for a nominal amount, and then went on to "charge itself" licensing fees that Nike Inc. had to pay to the subsidiary in order to use its own brand in Europe. The Dutch tax authorities were aware of and approved of this siphoning structure, but did not publish the private agreement they had with Nike.<ref>{{Cite web|url=https://www.icij.org/investigations/paradise-papers/nikes-sweetheart-dutch-tax-deal-ignored-economic-reality-eu-says/|title=Nike's Sweetheart Dutch Tax Deal Ignored 'Economic Reality,' EU Says|website=ICIJ|date=8 July 2019 |language=en-US|access-date=2019-09-30}}</ref> The licensing fees totaled $3.86Bn over the course of 3 years and were discovered due to an unrelated U.S.-based lawsuit as well as the [[Paradise Papers]].<ref>{{Cite web|url=https://www.icij.org/investigations/paradise-papers/swoosh-owner-nike-stays-ahead-of-the-regulator-icij/|title=Nike Stays Ahead Of The Regulators|website=ICIJ|date=6 November 2017 |language=en-US|access-date=2019-09-30}}</ref> In 2014, the Bermuda deal with Dutch authorities expired, and Nike shifted the profits to another offshore subsidiary, a [[Netherlands]]-based Limited Liability Partnership (CV, short for [[:nl:Commanditaire_vennootschap|Commanditaire Vennootschap]], generally known as a [[Kommanditgesellschaft]]). Through a Dutch tax loophole, CV's owned by individuals that are residing in the Netherlands are tax-free. Exploiting this structure saved Nike more than $1Bn in taxes annually and reduced its global tax rate to 13.1%; the company is currently being pursued for billions of dollars worth of [[back taxes]] in litigation by multiple governments for this multinational [[tax avoidance]].<ref>{{Cite news|url=https://www.theguardian.com/news/2017/nov/06/nike-tax-paradise-papers|title=Revealed: how Nike stays one step ahead of the taxman|last1=Hopkins|first1=Nick|date=2017-11-06|work=The Guardian|access-date=2019-09-30|last2=Bowers|first2=Simon|language=en-GB|issn=0261-3077}}</ref>