Sustainability and Creative Accounting

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Table of Contents

Introduction
Strategic Importance of Sustainability to Decision-Makers
Methods of Convincing to Adopt the SASB Standards
Types of Normal Manipulation of Revenue
Importance of Revenue Manipulation Discouragement
Conclusion
References

Introduction

Global decision-makers and academics are growing more interested in sustainability, and countless executives have become aware of the importance of the holistic corporate sustainability approach. Nevertheless, they encounter challenges when attempting to execute it in reality and link sustainability with strategic management. In general, sustainability serves as a marketing tool for most corporations, which allows them to gain a more significant competitive advantage and presence in the market. In order to become more renowned among the masses and be considered luring investments, the management of many firms even manipulates earnings. In this sense, sustainability and creative accounting are an integral part of most corporations that desire to be more successful.

Strategic Importance of Sustainability to Decision-Makers

When it comes to the strategic importance of sustainability to decision-makers, it lies within a more prominent presence in the market and recognizability. Organizations that become more sustainability-oriented, using resource-efficient technology, and providing eco-friendly goods and services, can benefit greatly from environmental governance, which outlines a company’s strategic stance with respect to sustainable development. According to a number of experts, including sustainability in company strategy is essential for achieving a long-term competitive edge in addition to the wellness of stakeholders, workers, and society at large (Calabrese et al., 2019). According to others, such initiatives must focus on the three organizational aspects of sustainability, which include financial, environmental, and social factors, as well as their effects and linkages (Calabrese et al., 2019). Essentially, by providing a conceptual model for the relevant decision-making mechanisms, these three components provide a method for integrating sustainability into strategy implementation.

In this sense, the sustainable strategy of most companies relies on a comprehensive framework. The fundamental principle of sustainability includes aspects related to the environment, the economy, and society and is ingrained in the long-term preservation of lifestyle quality (Calabrese et al., 2019). Due to their role in converting social and natural assets into commodities and services, major corporations are responsible for protecting the standard of living for future generations. In modern firms, the marketing function plays a significant role in the formulation of strategic decisions. Marketing is accountable for businesses’ and customers’ sustainable behavior attributable to its array of instruments for influencing, or controlling, consumption habits.

Methods of Convincing to Adopt the SASB Standards

The methods of convincing the C-suite to adopt the SASB standards must first recognize the most vital individuals who contribute to the decision-making about sustainability. The Chief Executive Officer is the most frequently involved decision-maker, followed by the Chief Sustainability Officer, Chief Operational Officer, and regional executives are the most commonly involved decision-maker within the C-suite (Johnson et al., 2020). According to processed data, respondents indicated that a minimum of one C-suite executive was in charge of setting sustainability problems’ priorities (Johnson et al., 2020). As a result, it seems that the sustainability prioritizing process involves a wide variety of decision-makers.

Utilizing the SASB model is a desirable alternative as a result since it gives businesses a cost-effective means to prioritize sustainability concerns that are important to the value of the firm and an important stakeholder group. The method of convincing will involve a sustainable strategic planning process that will pinpoint the areas where a corporation and society are increasingly interdependent in order to emphasize the benefit. The business will adopt a tactical and operational strategy that will pursue mutual benefit, which entails investing in sustainability initiatives that may profit both the business and society at large. In this sense, the corporation will have advantages from concentrating on investments from stakeholders for socially-accepted initiatives. This will allow the business to grow and have increased earnings that will contribute to further research and innovations.

Types of Normal Manipulation of Revenue

Regarding types of normal manipulation of revenue, these include many approaches, from investments to acquisitions. In the global ecosystem, revenue management is a complicated and cumulative problem. This phenomenon is a crucial and essential component of corporate finance. Profit management is the practice of managers manipulating income reports and transaction structures in order to deceive particular partners about the company’s financial success (Safta et al., 2020). It symbolizes the management’s choice of accounting principles that have an impact on revenues and the attainment of successful business outcomes (Safta et al., 2020). Since accounting information is the major source of data on the economic security, business output, and financial viability of any organization, inaccurate financial statements are detrimental to all parties.

The first type of accounting manipulation is the acquisition of another business. This strategy is similar to placing a speculative prediction, and one of its goals is to raise the purchased party’s reported earnings under the circumstances of a well-planned acquisition that is documented using one of the accounting techniques, such as through purchase (Strakova, 2021). The given approach has two related sub-techniques, including the process of incorporating the purchased business’s earnings into consolidated earnings and the deduction of expenditures for research and development paid for the business (Strakova, 2021). The first subsidiary method is deducting a portion of the purchase cost from current earnings during the year of purchase, protecting future revenue from the taxes, whose worth will rise relative to their initial value. In this sense, it affects earnings through additional income that comes from another firm.

Another type of accounting manipulation involves a company portfolio of investments. In a global setting, businesses have the option to purchase stocks from other businesses to reinvest extra cash or form a specialized strategic partnership (Strakova, 2021). An organization can control earnings by purchasing tradable and marketable assets. Operating profit includes gains or losses resulting from the sale of capital assets or fluctuations in their market price. The gain or loss resulting from a shift in the marketplace value of securities that are offered for sale is recorded in other income statements. If a situation emerges where assets offered for sale are traded, the gain or loss on such sales is reflected in the operating income of the firm (Strakova, 2021). Unacknowledged gains or losses are those that have not yet been realized and are reflected in profit but not operational earnings if the assets are not yet sold (Strakova, 2021). Therefore, such an approach allows to not disclose any realized losses in the earnings section and maintain the figure.

Importance of Revenue Manipulation Discouragement

Lastly, numerous businesses use reported earnings as a technique to keep profits growing steadily or stop negative numbers from turning in financial reports that are not advantageous to the business. Nevertheless, the line between earnings manipulation and fraud is quite thin, and the widespread use of creative accounting may be seen as a significant warning indicator for supporting specific fraud allegations. Due to the links between the balance sheet and other statements that give an overview of the cash flow, losses, and gains, fraud might always be revealed.

Overstating earnings and assets in financial accounts is common. Compared to embezzlement, deliberate financial statement misrepresentation is significantly more commonly observed in earnings. The median crime was $4.1 million, while the mean deception on a consolidated basis was $25 million (Mehta & Bhavani, 2017). Furthermore, it might be challenging for investigators, as well as other stakeholders, to identify fraud using standard audit processes. Generally, there are three reasons behind the inability and ineptitude to determine financial fraud and manipulations. The first is a lack of understanding of the aspects of detecting fraud (Mehta & Bhavani, 2017). The second problem is that assessors lack the expertise required to spot falsified income reports (Mehta & Bhavani, 2017). The third is that management develops innovative strategies to deceive shareholders and auditors (Mehta & Bhavani, 2017). In this sense, fraud is a major problem for everyone nowadays. Financial fraud is one of the many forms of wrongdoing that results in significant losses for shareholders as well as the national economy. Consequently, it is indeed critical to prevent and identify fraud before it destroys the company, harms stockholders, and undermines the economy.

Conclusion

Hence, most businesses that wish to become more successful often incorporate sustainability and inventive accounting. Greater market presence and recognizability are key factors in the strategic value of sustainability to decision-makers. A sustainable strategic planning approach might be used to identify the areas where a company and society are becoming more interconnected and to highlight the benefits. Regarding the many methods of recurring revenue manipulation, these range from investments to acquisitions. Still, among the various wrongdoings, financial fraud is one that causes significant losses for both stockholders and the national economy.

References

Calabrese, A., Costa, R., Levialdi, N., & Menichini, T. (2019). Integrating sustainability into strategic decision-making: A fuzzy AHP method for the selection of relevant sustainability issues. Technological Forecasting and Social Change, 139, 155-168.

Johnson, J. A., Sutton, S. G., & Theis, J. C. (2020). Prioritizing sustainability issues: insights from corporate managers about key decision-makers, reporting models, and stakeholder communications. Accounting and the Public Interest, 20(1), 28-60.

Mehta, A., & Bhavani, G. (2017). Application of forensic tools to detect fraud: The case of Toshiba. Journal of Forensic and Investigative Accounting, 9(1), 692-710.

Safta, I. L., Achim, M. V., & Borlea, S. N. (2020). Manipulation of financial statements through the use of creative accounting: Case of Romanian companies. Studia Universitatis Vasile Goldiș Arad, Seria Științe Economice, 30(3), 90-107.

Strakova, L. (2021). Motives and techniques of earnings management used in a global environment. SHS Web of Conferences, 92, 1-9.

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