Creative accounting involves the use of accounting practices and principles that adhere to the letter of the rules of standard accounting practices but deviate from the spirit of those rules. This kind of accounting presents company financial performance in an overly favorable light, often inflating profits and hiding liabilities.
The Enron scandal is a complex case of fraudulent accounting that led to the collapse of the energy giant Enron in 2001, one of the largest corporate bankruptcies in U.S. history, which subsequently led to significant legislative changes.
Structured finance refers to the creation of complex debt instruments through methods such as securitization or the incorporation of derivatives to existing instruments. It involves asset pooling, tranching of liabilities, and the creation of special purpose vehicles to mitigate risk.
