The role of corporate governance in preventing cosmetic accounting: A critical analysis

Abstract

Cosmetic accounting often referred to as creative accounting, involves intentional misrepresentation of financial statements to present a favorable picture of a company’s financial position without violating accounting standards. These practices can mislead stakeholders in decision making. The present study analyzes the role of corporate governance in preventing cosmetic accounting practices. Corporate governance mechanism is crucial for the companies to accelerate accountability, transparency and ethical conduct to ensure financial reporting sustainability. It is concerned with the relationship between company’s management and its board of directors, shareholders and lenders and other stakeholders such as employees, customers, suppliers etc. In this paper we reviewed major corporate scams done by companies with respect to key accounting manipulations and weak governance mechanism and what does it impacted the whole economy. The paper concludes that strong corporate governance, characterized by transparency, accountability, independent audits, and robust regulatory oversight, is essential to discourage cosmetic accounting practices and maintain stakeholder’s trust.