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© 2020 Conscientia Beam. All Rights Reserved. 

THE RELATIONSHIP BETWEEN CREATIVE ACCOUNTING RISKS AND AUDITING 
RISKS FROM THE PERSPECTIVE OF EXTERNAL AUDITORS IN SAUDI ARABIA   

 

 

 Wejdan Hassan M.  
Ghamri 

 

Lecturer in Accounting, College of Business, University of Jeddah, Saudi 
Arabia. 

 
 

 
 ABSTRACT 
 
Article History 
Received: 14 February 2020 
Revised: 17 March 2020 
Accepted: 20 April 2020 
Published: 12 May 2020 
 

Keywords 
Creative accounting 
External auditors 
Auditing risks 
Saudi Arabia. 

 
JEL Classification:  
A10. 

 
The present study aimed to identify the relationship between creative accounting risks 
and auditing risks from the perspective of external auditors in Saudi Arabia. The sample 
comprised licensed auditors who serve in Saudi statutory audit offices. The outcomes 
showed that external auditors were aware of creative accounting risks. In addition, their 
professional technical factors, such as professionalism, commitment to training 
programs and continuing education, mentorship, considering professional standards in 
auditing, good planning for external auditing, their supervision of auditing teamwork, 
and auditing fees, enormously helped identify creative auditing practices. There were no 
statistically significant differences in the external auditors' estimates of the effect of 
creative accounting risk on auditing risks according to the variables of (academic 
qualification, professional qualification, occupation, and experience). No statistically 
significant differences were found in the external auditors' estimates of the external 
auditor's responsibility to detect creative accounting practices according to these 
variables. The research recommends giving concern to the concept of creative 
accounting risks, and set the standards and procedures that the auditor must follow to 
address these practices because of their negative effects on the reliability of the financial 
statements. 
 

Contribution/Originality: This study was the first in Saudi Arabia to identify the external auditors' views on 

the impact of creative accounting risks on auditing. The findings will encourage statutory audit offices to consider 

detecting creative accounting practices, and thus confidence in financial reports is promoted. 

 

1. INTRODUCTION 

Constant expansion in the size and financial transaction s of the economic institutions has increased the 

relevant negatives and creative accounting practices which appeared in several terms, such as creative accounting, 

aggressive or fraudulent accounting, and profits smoothing, earnings management, income smoothing, cosmetic 

accounting, disclosure management, massive complex, …etc. 

The researcher claims that although the above-mentioned terms differ, the management adopts them to achieve 

unreal improvement in profit or financial status through exploiting the gaps in external auditing methods, or taking 

advantage of the alternative accounting policies which allow the company to use accounting standards in 

developing the measurement and disclosure methods to prepare inaccurate financial statements and avoid particular 

contractual issues (Alsahli, 2007; Matar, 1997). This manifests that reducing the risk of creative accounting 

practices in auditing is complicated, so the concerned ones constantly strive to uncover those practices, increase 

awareness, scientifically prove their seriousness for auditing, and reduce them (Alkhashawi & Aldossary, 2008). 

Financial Risk and Management Reviews 
2020 Vol. 6, No. 1, pp. 22-39. 
ISSN(e): 2411-6408 
ISSN(p): 2412-3404 
DOI: 10.18488/journal.89.2020.61.22.39 
© 2020 Conscientia Beam. All Rights Reserved. 

 
 
 

 
 
 

 

 
 
 
 

https://orcid.org/0000-0001-6703-3489
https://www.doi.org/10.18488/journal.89.2020.61.22.39


Financial Risk and Management Reviews, 2020, 6(1): 22-39 

 

 
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2. STATEMENT OF THE PROBLEM 

Because of the economic problems of the institutions, departments attempt to benefit from the flexibility offered 

by accounting standards to adopt creative accounting through influencing and directing decisions within the law to 

achieve their personal goals. The researcher contends that auditing plays an important role in reducing creative 

accounting risks, and promoting financial reports quality. Moreover, the auditor is responsible for identifying 

creative accounting risks, and making the financial statements report. This requires conducting adequate auditing 

procedures based on the concept of auditing risks to be sure that financial statements have no material 

misstatements resulting from creative accounting practices. Accordingly, the study seeks to address the issue by 

posing the following major question: 

What is the relationship between creative accounting risks and auditing risks from the perspective of external 

auditors in Saudi Arabia? 

This major question can be subdivided into two minor ones: 

1. What is the perspective of the external auditors on creative accounting methods adopted by companies in 

Saudi Arabia? 

2.  What is the responsibility of the external auditor for detecting creative auditing practices from the 

perspective of external auditors in Saudi Arabia? 

 

3. SIGNIFICANCE  

Reviewing the previous local, Arabic and foreign pieces of literature demonstrated lack in the papers and 

studies that addressed the topic under study. Thus, significance of the present study stems from the fact that it is 

the first one to address such issue in Saudi Arabia. Hence, it will enrich scientific research, especially with regard to 

assessing the external auditors' views on the impact of creative accounting risks on auditing. The researcher also 

expects that the field study, which is conducted in Saudi Arabia, will encourage statutory audit offices to consider 

detecting creative accounting practices, so confidence in financial reports is promoted. 

 

4. OBJECTIVES  

The present study aims to identify the relationship between creative accounting risks and auditing risks from 

the perspective of external auditors. 

The major objective can be subdivided into the following minor objectives:  

 Identify the effect of creative accounting risk on auditing, define the difference between accounting error; accounting 

fraud; and creative accounting, and address the debate among researchers on methods; procedures and detection of 

creative accounting, as well as its impact on the reliability of financial data and reports. 

 Identify the external auditors' perspectives on creative accounting practices. 

 

5. HYPOTHESES  

 There are no statistically significant differences at significance level (α≤ 0.05) in the external auditors' 

estimates of the effect of the creative accounting risks on auditing risks according to the study variables. 

 There are no statistically significant differences at significance level (α≤ 0.05) in the external auditors' 

estimates of the external auditor's responsibility to detect creative accounting practices according to the 

study variables. 

 

6. METHODOLOGY  

The study adopted the descriptive analytical approach. For the descriptive approach, the researcher read 

relevant books, periodicals, Arabic and foreign articles, as well as theoretical and field papers to develop the 

foundations on which the concept of creative accounting is based. Thus, the researcher can provide a background on 



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creative accounting risks and their relationship to auditing risk. Moreover, the researcher read the relevant 

previous pieces of literature, which constitute the study domains. For the analytical field approach, a survey was 

conducted; the data obtained from the questionnaire, which was distributed to answer the questions and test the 

hypotheses of the study, were analyzed; and the outcomes were interpreted using the appropriate statistical 

methods. 

 

7. LIMITS 

 Spatial limits: The study was conducted at Saudi statutory audit offices available on the official website of 

the Saudi Organization for Certified Public Accountants (SOCPA) and (2) questionnaires were sent to each 

office. 

 Temporal limits: The study was conducted for the academic year 2019/2020. 

 

8. THEORETICAL FRAMEWORK 

8.1. Creative Accounting  

According to Agostini and Favero (2012) creative accounting is "the process by which creativity organizes the 

accounting outcomes required in advance, rather than neutral and consistent outcomes ".  Hammad (2006) defines it 

as "a broad term that comprises all practices that adjust the presented financial outcomes as well as financial status, 

and change the attitude towards the performance of the institution. It is a comprehensive term that describes all 

measures (i.e. aggressive accounting, profit management, mitigating income fluctuations, or fraudulent financial 

reporting). 

Amora and Sharifi (2011) define it as "providing accounting information in the form of high-quality 

information, which benefits beneficiaries, so they always search for it, and wish to obtain it. According to Bataineh 

(2010) it denotes adopting some tricks and accounting methods to raise the profile of the joint stock company in 

terms of the strength of its financial status, volume of net profits, or its competitive; financial and transaction al 

status. 

The researcher claims that although the above-mentioned definitions differ, they agree that creative accounting 

is a procedure adopted by the management to achieve unreal improvement in financial statements   through 

exploiting the weaknesses in external auditing methods as well as measurement and disclosure methods to present 

inaccurate financial numbers and achieve particular goals. Therefore, the auditor should be distinguished with 

credibility, transparency and the ability to adopt standards with which he can easily detect fraud and its percentage. 

 

8.2. Positive and Negative Aspects of Creative Accounting 

Despite controversy on creative accounting practices, most researchers agree that it has two aspects:  

I. Positive Aspect: Accountants resort to imagination to explain financial, economic and legal innovations 

which lack standard accounting solutions when they occur. In other words, it helps find unfamiliar 

accounting solutions and procedures that help make decisions, provide high quality accounting 

information, as well as renews and develops accounting methods and procedures (Amora & Sharifi, 

2011; Karim, Fowzia, & Rashid, 2011). 

II. Negative Aspect: Creative accounting involves adopting tricks, methods of misrepresentation and numbers 

manipulation, i.e. adjustments arising from financial engineering, to demonstrate a particular situation 

in accordance with its effect on the balance sheet and the company outcomes to serve the interests of 

certain parties or conceal facts. Jameson (1988) stated that creative accounting practices do not violate 

law or accounting standards, so they are consistent with the law not with the spirit of the law. 

However, they distort financial outcomes and corporate positions, as well as mislead users of 

accounting information (Amora & Sharifi, 2011; Karim et al., 2011). 



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The researcher supports the negative aspect of creative accounting practices because they transform reality 

into a desired state to achieve personal interests that may contradict the others', and this is a deception in the 

financial report. Furthermore, deception fundamentally affects the financial reports. Transformation process may be 

considered fraud in the financial statements. She also asserts that most researchers classify it as fraud in the 

financial reports, and others classify it as management fraud. Although some creative accounting methods are 

acceptable, they result in incorrect and misleading financial statements. Figure 1 shows the nature of creative 

accounting practices. 

 
Figure-1. Nature of creative accounting practices. 

 

8.3. Creative Accounting 

The researcher claims that creative accounting is the accountant’s ability to find new things, i.e. ideas, 

solutions, methods, procedures or practices when using his/her skills and creative personal experience to devise 

new accounting methods that help find accounting solutions and achieve particular goals for the benefit of certain 

parties although they may conflict with the others' interests and fail to achieve the overall benefit. Hamada (2010) 

clarifies the common aspects of creative accounting practices, as follows: 

 Exploitative practices adopted in selecting accounting estimates. 

 Unavoidable practices. 

 General and common practices. 

 Reasonable practices. 

 Fraudulent practices that convert real numbers to unreal ones. 

 Legal practices that are within the framework of international accounting principles and standards. 

 Practices harmful to internal and external parties. 

Hammad (2006) reports that creative accounting practices involve the whole methods used in financial numbers 

manipulation, including intentional and unintentional selection, deceptive and unethical application of accepted 

accounting principles, fraudulent financial reports, and the steps that manage profits or reduce income fluctuations.  

Saleh and Fatiha (2010) indicates that creative accounting comprises several characteristics, such as the 

accountant's ability to analyze and synthesize, visualize and use intuition, have courage and self-confidence, and 

develop his/her self through self-criticism. 

The researcher contends that accounting error is unintentionally committed, but the values of the financial 

statements involve items against the accepted accounting principles. When it is detected, the necessary adjustments 

are made to correct the items of the financial statements. In addition, it signifies distortion, negligence, or 

unintentional exclusion that occurs because the personnel of accounts department ignore accounting standards. 

Whereas, fraud is associated with the attempt be hidden to cause intentional misrepresentations that cannot be 

easily detected. Moreover, its detection is related to the strength or weakness of the internal control system, and 

the auditor's ability to detect and observe the distortions. Sacks (2004) states that what distinguishes accounting 

fraud from accounting error is that fraud is intentionally committed, and occurs either in misleading financial 

statements, or in financial assets embezzlement. In addition, no comprehensive system is available for detecting 

accounting fraud. Thus, the auditor may fail to detect it despite the appropriate planning for auditing process. Table 

1 shows the similarities and differences between error, fraud and accounting creativity. 

 



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Table-1. Similarities and differences between accounting error, accounting fraud, and creative accounting. 

Accounting Error Accounting Fraud Creative Accounting 

Illegal procedure  Illegal procedure legal procedure 
Unintentional intentional intentional 
Easy detection difficult detection difficult detection 
Misleading financial statements misleading financial statements misleading financial statements 

      Note: All cases have the same result, i.e. presenting misleading financial statements. 

 

8.4. The Relationship between Creative Accounting Risk and Auditing Risk 

The topic of creative accounting risk and auditing risk has grabbed the attention of numerous affiliations 

because the higher the quality of auditing process, the less the auditing risk. Hence, the auditor feels confident to 

express his/her neutral technical opinion on the validity and reliability of the financial statements.  Accordingly, 

auditing risk is a substantial but unintended failure in the financial statements (Bernoth & Wolff, 2006). 

 

8.5. Audit Risk Components  

8.5.1. Inherent Risk 

Inherent risk is embedded in the nature of the institution, industry, or account. It also denotes the exposure of a 

transaction, an account, or a balance in the financial statements to a serious error with no internal control 

procedures. Risk always occurs if the financial statements are inaccurate. The administration may insert incorrect 

data to show an increase or decrease in net profit. Thus, more return is obtained and the amount of zakat or taxes 

reduces.  Various examples reflect such improper actions. Therefore, the auditor must properly know the activity 

and the financial status of the company as well as the surrounding circumstances, and verify that the creators of 

financial statements encounter no pressure. Consequently, he/she can accurately assess inherent risk when planning 

for auditing process, which increases the effectiveness of his/ her decisions in detecting those errors and 

irregularities that cause fundamental distortion in the financial statements (Alanqari, 2007; Almaqtari, 2011). 

The standard of auditing risks and relative significance issued by the Saudi Organization for Certified Public 

Accountants (2000) defines the inherent risk as “the possibility that the company statements conceal serious errors 

and fraud assuming the absence of internal control procedures.” (Item 142). The American Auditing Standard No. 

(47) defines it as “the financial statements certainty of  creative accounting practices assuming the absence of 

internal control structure” (Farag, 2009). 

 

8.6. Control Risk  

It denotes that the internal control may not prevent or detect fundamental errors in one or more elements in 

the financial statements.  It may involve the risk of accessing confidential data files, as well. Hence, the auditor 

should identify the elements, efficiency, and weaknesses of the internal control structure on one hand. On the other 

hand, he/she should conduct commitment tests to justify control risk reduction below the maximum level 

(Almaqtari, 2011). 

The standard of auditing risks and relative significance issued by the Saudi Organization for Certified Public 

Accountants (2000) defines control risk as “serious errors and fraud are not prevented or detected in the statements 

on time because of the internal control weakness.” (Item 143). Control risks have a direct correlation with the 

effectiveness of designing and implementing internal control in achieving the establishment's goals related to 

preparing its financial statements. It is an internal risk that the auditor cannot influence, but he/she should only 

evaluate it to define the required auditing procedures which reduce the detection risk to the acceptable level 

(Kharwat, 2009). The American Auditing Standard No. (47) defines it as “the creative accounting risks that occur in 

a particular certainty in the financial statements and cannot be prevented or detected by the internal control 

procedures "(Farag, 2009). 

 



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8.7. Detection Risk  

It implies that the auditor may fail to detect the errors in the financial statements that have not been prevented 

or detected by internal control accounting system. In addition, it is the only element that the auditor can control by 

increasing or decreasing the basic tests, which are carried out in the stages of planning and implementing auditing 

process.  Accordingly, the auditor should analyze and evaluate inherent risk, as well as carefully examine and 

estimate control risk to reduce detection risk to the lowest possible level. 

The standard of auditing risks and relative significance  issued by the Saudi Organization for Certified Public 

Accountants (2000) defines it as" the auditor's inability to detect serious error or fraud in one of the certainties. It is 

associated with the effectiveness of auditing procedure, and how the auditor applies it. These risks partially stem 

from uncertainty elements arising from the auditor's failure to examine 100% of the account balance or type of 

transaction, and from other uncertainty elements that exist even if the auditor examines 100% of the account 

balance or a type of transactions. Other uncertainty elements arise from performing inappropriate auditing, poor 

application of an appropriate procedure, or misinterpretation of auditing results. Other uncertainty elements may be 

reduced to a negligible level through adequate planning, supervision, and implementation of the office's auditing 

work in accordance with appropriate control standards ”(item 144). The American Auditing Standard no. (47) 

defines non-detection risks as “the inability of auditing procedures to detect creative accounting practices that exist 

in a particular certainty in the financial statements.” 

  International Standard No. (400) defines creative accounting risks as (non-detection risk) as “the risks 

resulting from not detecting the auditing procedures the auditor performs - creative accounting practices in the 

account balance or in a type of transactions. This may be distortion in itself or if added to other creative accounting 

practices in the balances of other accounts or other types of transactions” (Farag, 2009). 

 

8.8. Major Elements of Creative Accounting Risks and their Effect on Auditing Quality  

8.8.1. Litigation Risk 

Litigation risk is one of the factors that influence auditing profession, as well as accounting information and its 

quality. The auditor is sued when the client claims that he/she did not do the task competently, i.e. the auditor 

failed to detect creative accounting practices in the financial statements, or detected them, but never reported them. 

Several studies addressed the factors affecting the auditor's litigation as clarified in (financial hardship, growth in 

ownership, long / short auditing period, auditor's independence, adjusted opinion, and size of the customer's 

establishment). 

 

8.9. Sanctions Risk 

It represents the penalties and sanctions which regulators impose on the auditor because of his/her issues with 

the client. They affect his/her salary, behavior and professional reputation. 

 

8.10. Damaging the Auditor's Professional Reputation  

Damaging the auditor's reputation is an aspect of creative accounting risks because of his/ her litigation or 

sanctions. His/her reputation is a determinant of his/her professional performance quality. Fearnley, Beattie, and 

Brandt (2005) state that auditing risks can be countered by auditing the account balances annually, and testing 

compliance with internal control systems through paying frequent visits to the company's control systems, 

especially the automated ones. Combating creative accounting risk is difficult and complicated. Thus, auditors seek 

to know the developments of creative accounting to detect and reduce its risk. 

Hamada (2010) argues that the role of audit committee should be activated to diminish creative accounting 

practices and carry out the following procedures and tasks:  



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 Supervise and oversee the financial reports, as well as investigate and disclose the adopted accounting 

policies in light of the objectives of the financial reports. 

 Support and improve the quality of the external audit function through appointing experienced and 

competent auditors, help the external auditor do his/her tasks and maintain independence, coordinate 

between the external auditor and the internal auditor and consider their observations, and oversee the 

services of the external auditor to increase the investors and external parties' confidence in financial 

reports. 

 Examine the activities, plans and results of the internal auditing, and evaluate its performance. 

 Evaluate internal control systems to address weaknesses and strengthen them. 

 Audit committees oversee the company's business to ensure a high level of disclosure, transparency, and appropriateness 

for its clients. 

 Risk management in companies: Supervise risk management, help the administration design risk management 

strategy according to different types of risks, comprehend  the relationship between risk management and financial 

reports, assess fraud risk at every level of the management, help identify risks to take advantage of opportunities and  

reduce uncertainty, and assess adequacy of risk control; including external risks. 

 

8.11. Factors of Creative Accounting Risks  

According to Hammad (2006) and Farag (2009) they are the characteristics that reflect creative accounting 

practices in the company, and are defined, as follows:  

 Risk factors related to management characteristics and their impact on control environment: They are closely 

related to the management capabilities, pressures, and its relationship with internal control as well as the 

financial reporting. 

 Risk factors related to industry circumstances: They involve the economic and organizational environment 

where the facility operates. 

 Risk factors related to operational characteristics and financial stability: They are associated with the complicated 

nature, transactions, financial status, and profits of the facility. 

Accordingly, Farag (2009) claims that factors of creative accounting risks should be classified based on the triangle 

of creative accounting risks which involve the three following factors:  

 Motivational factors: The management's willingness to do creative accounting practices in the financial 

statements. 

 Opportunities-related factors: The opportunity to perform creative accounting practices and the possibility of 

their occurrence in the financial statements. These factors are represented in weakness of the internal 

control structure. 

 Logical justifications: The ability of those involved in creative accounting practices to justify their action, 

especially in light of opportunities availability, because they usually have the ability to deceive. 

Risk model reveals that the auditor successfully detect these practices if he is able to: 

 Properly identify factors of creative accounting risks.  

 Assess creative accounting risks accordingly. 

 Establish audit procedures that reduce the risks of material distortions in the financial statements resulting 

from undetected creative accounting practices. 

 

9. LITERATURE REVIEW   

Alwashali (2010) measured the auditors' perception of the responsibility to assess and detect management fraud 

and their response to fraud risks, as well as the relative effect of their characteristics on detecting management 

fraud.  



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Hamada (2010) covered the activities carried out by the audit committees to reduce creative accounting 

practices, and the views of external auditors and members of audit committee on the role of audit committee in 

reducing these practices. To achieve the study objective, the deductive inductive approach was adopted. The 

researcher distributed a questionnaire to some external auditors and members of the audit committee in joint-stock 

companies in Syria. The questionnaire comprised the audit committees' activities when carrying out their tasks to 

reduce these practice in companies.  

Salome, Ogbonna, Marcel, and Echezonachi (2012) addressed the impact of creative accounting on accountants' 

performance when reporting financial statements and data in Nigeria, the financial reporting system, the process of 

choosing an accounting policy, and handling financial reports. They also aimed to verify whether a well-designed 

framework of accounting regulations can reduce creative accounting practices in the financial reports of companies. 

The study employed empirical survey. (227) out of (500) participants were selected. 

Almaqtari (2011) investigated improving quality, addressing changes of the competitive environment in 

auditing market, and reducing audit risks through highlighting the auditor's professional role in improving audit 

risks estimates in Yemen. Moreover, a field study, focusing on the Yemeni business environment and involving a 

sample of auditors, was conducted.  

The results of the theoretical and field study highlighted the importance of the auditor's professional 

specialization in auditing which improves the efficacy of audit risk assessment represented in control risk, detection 

risk, and inherent risk. This is accomplished through the accurate defining of compliance tests, improving the 

decisions of audit process planning, reinforcing the auditor's independence, detecting profit management cases, 

upgrade professional competition among audit offices, and reducing the cases of using experts. The aforementioned 

variables reflect the quality of professional performance. This agreement reflects the auditors' perception of the 

importance of auditing specialization in improving the quality of professional performance. 

Karim et al. (2011) tackled causes, techniques, and consequences of creative accounting. Findings of the 

descriptive statistics revealed that the perceptions of the three categories of the participants are different about the 

various aspects of creative accounting .They also showed the opinions and concerns of internal auditors, external 

auditors and accountants on these practices continuity. They study revealed that creative accounting is a global one 

and accounting policy choice represents a particular problem for both developed and developing countries. 

Furthermore, various methods encourage managers to engage in creative accounting. In addition, accountants who 

accept the ethical challenge that creative accounting raise need to be aware of the scope for both abuse of accounting 

policy choice and manipulation of transactions. 

 Alqateesh and Alsufi (2011) shed light on the most important methods adopted in creative accounting and 

their impact on the reliability of accounting data. They also aimed to identify creative accounting practices and the 

auditor's role in such practices. The study adopted the descriptive analytical approach and (50) questionnaires were 

distributed to some audit offices in Jordan. The results exhibited that the public joint stock companies in Amman 

Stock Exchange do not manipulate obligations, revenues, expenses, assets and property rights using creative 

accounting practices. 

Abu Tammam (2013) aimed to identify creative accounting practices used in cash flow statements, and its 

impact on the reliability of the financial statements included in cash flow statements. To achieve the study objective, 

the researchers addressed two types of data: preliminary data and secondary data. The sample comprised (261) 

accountants, auditors, financial analysts, and financial data users.  

The study manifested the effect of using creative accounting practices on the reliability and relevance of cash 

flow statements. In addition, there were no statistically significant differences in the participants' opinions on the 

accountants, auditors, financial analysts, and financial statements users' perception of the procedures that can be 

employed to reduce the effects of creative accounting on cash flow statements. 



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Alazmi (2015) addressed how to counter auditing risks resulted from creative accounting practice, narrow 

expectations gap, and achieve the desired quality of auditing process using various mechanisms to prevent creative 

accounting practices, enhance the reliability of accounting information, and narrow the gap of credibility and 

confidence in auditing  profession, The study adopted the inductive deductive approach. The results showed 

statistically significant differences between the methods of creative accounting practices and auditing quality. In 

addition, auditing process is responsible for exposing the faults of creative accounting. 

Alzain (2017) tackled the role of constant auditing in increasing confidence in the electronic financial 

statements of the Sudanese banks, and reducing their manipulation as well as online penetration risk. The study 

aimed to increase transparency of financial statements in Sudanese banks, reduce manipulation of profit rates in the 

electronic financial statements, and develop new auditing methods that increase the efficacy of the information 

presented to users. Significance of the study lies in activating the role of constant control in reducing the risks of 

the electronic availability of financial statements in the Sudanese banks and helping the statements users make the 

proper decisions regarding their investments in these banks. The modern methods used by banks increased the 

penetration risks for the reports presented to the internal and external users. 

The results demonstrated that constant auditing reduces creative accounting practices in income statement, 

financial status and cash flows.  Moreover, delivering training to internal auditors and arranging internal and 

external courses increase their ability to detect errors. Additionally, constant auditing reduces manipulation in the 

electronic financial reports. The study recommended giving concern to appointing qualified employees at internal 

audit department. Furthermore, professional organizations should transfer internal auditors to learn modern 

methods of detecting errors. In addition, instant examination of the sites, on which the bank’s financial reports are 

published, has to be conducted. 

Ali and Jellaba (2017) addressed the impact of creative accounting on the quality of accounting information in 

the banks' financial statements and how far the accountant's ethical behavior contributes to its emergence. The 

study demonstrated the necessity of increasing concern for the accountant's ethical aspect in order not to adopt 

creative accounting practices. The study recommended applying relative consistency to accounting methods and 

policies to help compare the financial statements. 

Abu Alkhair (2018) addressed the role of the international auditing standards in reducing creative accounting 

practices in the financial statements. The study adopted the descriptive approach by presenting various definitions 

and terms relevant to the subject using the preliminary and secondary information obtained from books, journals, 

studies and periodicals.  It also utilized Statistical Package for Social Sciences (SPSS) and analytical approach. 

The results revealed that accounting information resulting from financial statements prepared in accordance 

with the requirements of auditing standard No (500) for evidence in accurate financial statements. Moreover, the 

auditor knows that the more the risks, the more evidence he/she uses. He/she also has the right to select the 

evidence appropriate for the examined account.  Furthermore, accounting information resulting from financial 

statements prepared in accordance with the requirements of audit standard No. (560) for the consequences, 

following the budget date has a high degree of relevance and objectivity that helps the statements users to make 

correct economic decisions. In addition, failure to modify data of the financial reports affected by the consequences 

following the balance sheet date exposes enterprises to numerous crises and losses, such as paying taxes on 

fictitious profits and distributing fictitious profits, which cause their capital erosion. 

Alsayaghi (2018) investigated modern methods of control to disclose creative accounting practices and reduce 

risks. The study adopted the historical deductive approach to define the study domains and the descriptive 

analytical approach to collect data using the questionnaire that was distributed to (150) joint stock companies and 

Sudanese banks. The results demonstrated that adopting modern methods of control contributes to exposing 

creative accounting risks in Sudanese banks. Moreover, there was positive relationship between adopting modern 

methods of control and risks reduction in the Sudanese banks in Khartoum. 



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Most previous pieces of literature separately covered auditing risks and creative accounting risks, where most 

studies that addressed auditing risks focused on the external auditor's contribution to mitigating their impact on the 

financial statements. In addition, majority of studies clarified the concept, nature, causes, ethical aspects, and 

consequences of creative accounting practices and the external auditor's roles in reducing them. Moreover, the 

relationship between creative accounting risks and auditing risks has not been adequately covered. Thus, the 

present study attempts to shed light on it. 

 

10. SAMPLING  

The sample comprises (138) licensed Saudi statutory audit offices available on the official website of the Saudi 

Organization for Certified Public Accountants (SOCPA). The statement involved names, addresses, telephone 

numbers of the offices as well as names and number of the licensed auditors who were approximately (200).  

Accordingly, the researcher distributed (200) questionnaires to a random sample of auditors serving in in Saudi 

statutory audit offices. The researcher collected 143 questionnaires with a percentage of (71.5%). The researcher 

could not collect the other questionnaires because the auditors lacked cooperation. Only (3) incomplete 

questionnaires were excluded, so (140) questionnaires with a percentage of (70%) were valid for the analysis. Table 

2 shows the characteristics of the sample. 

 
Table-2. Characteristics of sample according to its variables. 

Variable Category Number Percentage 

 
Scientific Qualification  

Bachelor 118 84.3 
Master 22 14.3 
Doctorate 2 1.4 

Total 142 122.2 

 
Professional Qualification  

 

 

 

 

Saudi Fellowship 22 15.7 

American Fellowship 11 7.9 

British Fellowship 3 2.1 

Other 124 74.3 
Total 142 122.2 

 
Occupation  

Auditor 51 36.4 
Senior Auditor 42 32.2 
Auditing Director 47 33.6 

Total 142 122.2 

 
Experience  

Less than five years 19 13.6 
5-10 years 31 22.1 

More than ten year 92 64.3 

Total 142 122.2 
                   

The Table exhibits that the percentage of bachelor was the highest (84.3%) compared to that of the other 

qualifications. 

 

10.1. Data Collection 

The questionnaire was adopted as a tool to collect the data essential to answer the questions and test the 

hypotheses. It is a tool frequently used in many Arabic and foreign studies to evaluate opinions because it is 

transparent and comprehensive. It first indicated title, objectives and concepts of the study. It was divided into two 

sections, as follows: 

 

 

 

 



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10.2. First Section  

It involves the participants' personal data and four items (scientific qualification, professional qualification, 

occupation, and experience) to measure the differences in external auditors' estimates of the study domains 

according to the above-mentioned variables to test the study hypotheses. 

 

10.3. Second Section  

It comprises the questionnaire questions which measure the questions and hypotheses of the study. It contains 

the two following domains: 

 First Domain: It evaluates the impact of the creative accounting risks on auditing risks from the perspective 

of external auditors to test the first hypothesis. Accordingly, it was divided into two parts: The first 

involves (20) items showing examples of creative accounting practices selected from the previous pieces of 

literature,  particularly the study of Alqari (2010) which covered the most prevalent practices in Saudi 

Arabia, to answer the question of the study from the external auditors' perspective on those practices in 

terms of their consistency or inconsistency with the accepted accounting principles, or whether they are 

classified as accounting fraud; to identify  their impact on auditing risk; and to the answer the major 

question on defining the relationship between creative accounting practices and auditing risks. The second 

part comprises (7) items. The first part adopts three-point Likert scale (contrast the accepted accounting 

principles, does not contrast the accepted accounting principles, and accounting fraud). However, the 

second part adopts five-point Likert scale (strongly agree, agree, undecided, disagree, and strongly 

disagree).  

 Second Domain: It measures the external auditors' perspective on their responsibility to detect creative 

accounting practices to test the second hypothesis. It consists of (7) items and adopts 5-point Likert scale 

(strongly agree, agree, undecided, disagree, and strongly disagree). 

 

10.4. Validity and Reliability  

To verify the questionnaire validity, it was reviewed by distinguished reviewers from the faculty members at 

Accounting Department, Faculty of Economics and Administration, King Abdulaziz University, as well as some 

external auditors who serve in Saudi statutory audit offices to evaluate the participants' opinions and to benefit from 

their experience in accounting and auditing. The researcher asked the reviewers to express their opinion about how 

far the items matched their objective, and how far the items were clear and comprehensive, and to adjust, add, or 

delete some items. 

To verify the tool reliability, the researcher applied it to a pilot sample consisting of (30) participants selected 

from and out of the study population. Then, Cronbach's alpha was calculated. Table 3 shows Cronbach’s Alpha 

reliability coefficient. 

 
Table-3. Tools Reliability Coefficients according to Cronbach's alpha. 

Item Domain Reliability Coefficient 

Creative accounting risks in auditing risks 
Creative accounting practices  2.92 

Relationship between creative 
accounting risks and auditing risks 

2.88 

The external auditor's responsibility to 
detect creative accounting   

- 2.89 

    

Table 3 shows that reliability coefficients for the domain of creative accounting risks in auditing risks were 

(0.88) and (0.92), and (0.89) for the external auditor's responsibility to detect creative accounting.    

 

 



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11. RESULTS AND DISCUSSION  

To answer the first question, arithmetic means and standard deviations of the participants' responses on the 

creative accounting practices of the companies were estimated.  The researcher classified the arithmetic means as 

follows:  less than or equal (1.66) is consistent with the accepted accounting principles, above (1.66) and less than or 

equal (2.33) is inconsistent with the accepted accounting principles, and above (2.33) is fraud. Table 4 shows 

Arithmetic means and standard deviations of the participants' responses on the creative accounting practices of the 

companies.  

 
Table-4. Arithmetic means and standard deviations of the participants' responses on the creative accounting practices of the companies. 

Accounting Method Mean Standard 
deviation 

Percentage Classification 
Degree Consistent Inconsistent Fraud 

Postpone sales recording to 
obtain an increase in sales 
in the next fiscal year. 

2.56 2.58 4.3 35.7 62.2 Fraud 

The holding company does 
not disclose the subsidiaries 
losses. 

2.44 2.55 2.9 52.2 47.1 Fraud 

Send goods to potential 
customers, and record them 
as sales to expedite 
approving their revenue. 

2.44 2.68 12.7 34.3 55.2 Fraud 

Exaggeration or reduction 
in the inventory 
assessment. 

2.44 2.59 5.2 46.4 48.6 Fraud 

Transfer current expenses 
to previous or following 

accounting periods. 

2.39 2.53 2.1 56.4 41.4 Fraud 

Conceal liabilities or 
restrictions of some assets, 
such as mortgage, security, 
and leasing. 

2.39 2.56 3.6 54.3 42.1 Fraud 

Intentionally improve 
liquidity ratios by not 
including due installments 
from long-term loans 
throughout the year. 

2.36 2.62 7.9 48.6 43.6 Fraud 

Overestimate the value of 
intangible assets. 

2.34 2.65 12.2 45.7 44.3 Fraud 

Change the classification of 
short-term investments to 
long-term investments to 
avoid the effects of falling 
prices 

2.31 2.64 9.3 52.2 42.7 Consistent 

Keep accounting books 
open for some days despite 
the end of their fiscal year 
to record some expected 
sales (in agreement with 
customers). 

2.31 2.63 9.3 52.7 42.2 Consistent 

Possess the assets of a 
subsidiary through rights 
merger (book value). Then, 
sell them to make gains 
added to profit with no 
disclosure. 

2.22 2.61 12.7 58.6 32.7 Consistent 

Overestimate  future profits 
corresponding to 
 revenue expenditure 
(advertising expenses) 

2.22 2.65 12.9 54.3 32.9 Consistent 



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Inventory is stagnant or 
obsolete. 

2.19 2.74 19.3 42.9 37.9 Consistent 

Non-recurring revenues are 
categorized as operating 
earnings. 

2.16 2.53 7.1 72.2 22.9 Consistent 

Influence depreciation rate 
through changing the 
adopted depreciation 
method. 

2.13 2.62 13.6 62.2 26.4 Consistent 

Classify some operating 
expenses as non-recurring 
losses in income statement. 

2.12 2.58 11.4 65.2 23.6 Consistent 

Revenue is rapidly recorded 
although sale process has 
not been confirmed yet. 

2.11 2.52 8.6 71.4 22.2 Consistent 

Capitalization of research 
and development expenses 
with no requirements for 
capitalization. 

2.11 2.44 5.2 79.3 15.7 Consistent 

Overestimate or 
underestimate the asset life. 

2.29 2.65 17.1 57.1 25.7 Consistent 

Underestimate allowance 
for doubtful account 
 

2.23 2.61 17.1 62.9 22.2 Consistent 

 

 

Table 4 indicates that, according to the perspective of the Saudi external auditors on the creative accounting 

methods adopted by the companies, some methods contradict the accepted accounting principles, while others are 

classified as fraud. However, none is classified as" does not contradict accounting principles". 

This result asserts that creative accounting practices affect the reliability of financial reports as well as auditing 

risks if they are not detected or reported.  (60%) of creative accounting practices contradicted the accepted 

accounting principles, and (40%) was classified as fraud. The researcher contends that creative accounting practices 

are considered fraud because they affect the reliability of financial reports regardless their impact degree. Thus, 

auditors must take into account, when assessing auditing risks, factors and practices of creative accounting and 

report them to enhance the quality of financial reports. In addition, the accounting practices classified as fraud are 

represented, as follows: Postpone sales recording to obtain an increase in sales in the next fiscal year ranked first; 

with arithmetic mean ( 2.56), the holding company does not disclose the subsidiaries losses, and send goods to 

potential customers as well as  record them as sales to expedite approving their  revenue ranked second; with 

arithmetic mean ( 2.44), transfer current expenses to previous or following  accounting periods and conceal 

liabilities or restrictions of some assets, such as mortgage; security and leasing ranked third, with arithmetic mean ( 

2.39), and overestimate the value of intangible assets raked fifth and last, with arithmetic mean ( 2.34).  

Moreover, the accounting practices that contradict the accepted accounting practices are represented, as 

follows: Change the classification of short-term investments to long-term investments to avoid the effects of falling 

prices and keep accounting books open for some days despite the end of their fiscal year to record some expected 

sales (in agreement with customers) ranked first; with arithmetic mean ( 2.31), possess the assets of a subsidiary 

through rights merger (book value) and sell them to make gains added to profit with no disclosure as well as 

overestimate  future profits corresponding to  revenue expenditure (advertising expenses) ranked second; with 

arithmetic mean ( 2.20), inventory is stagnant or obsolete ranked third; with arithmetic mean ( 2.19), non-recurring 

revenues  are categorized as operating earnings ranked fourth; with arithmetic mean ( 2.16), influence depreciation 

rate through changing the adopted depreciation method ranked fifth; with arithmetic mean ( 2.13), classify some 

operating expenses as non-recurring losses ranked sixth; with arithmetic mean ( 2.12), revenue is rapidly recorded 

although sale process has not been confirmed yet  as well as  capitalization of research and development expenses 

with no requirements for capitalization ranked seventh; with arithmetic mean ( 2.11), overestimate or underestimate 



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the asset life ranked eighth; with arithmetic mean ( 2.09), and underestimate allowance for doubtful account ranked 

last; with arithmetic mean ( 2.03).  

To answer the second question, arithmetic means and standard deviations of the participants' responses at the 

level of each item and at the total level were estimated.  The researcher classified the arithmetic means, as follows:  

Less than or equal (2.33) is low, above (2.33) and less than or equal (3.66) is moderate, and above (3.66) is high.  
 
 
Table-5. Arithmetic means and standard deviations of the participants' responses on the relationship between creative accounting risks and the 
auditing risks. 

Item Rank Arithmetic 
mean 

Standard 
Deviations 

Relationship 
Degree 

The higher the quality of auditing process, the fewer 
the accounting practices risks.  

1 4.41 2.74 High 

Failure to detect errors and manipulation in financial 
statements increases accounting practices risks. 

2 4.27 2.78 High 

Accounting practices risks are considered when 
estimating auditing risks.  

3 4.14 2.82 High 

Accounting practices risks form a substantial 
element of auditing risks if the auditor does not 
detect them and report the financial statements 
accurately.  

4 4.12 2.77 High 

Accounting practices risks is relevant to non-
detection risk which has to be combined with control 
risk and inherent risks to identify the accepted 
auditing risk.  

5 4.27 2.75 High 

Accounting practices help conceal the actual 
performance of companies as well as distortion in 
financial statements.  

6 4.26 1.25 High 

The fewer control risks and inherent risks that the 
auditor conceives, the more the detection of 
accounting practices that the auditor accepts.    

7 3.93 2.94 High 

Total - 4.14 2.53 High 
 

 

Table 5 reveals that the mean of the participants' estimates of the relationship between creative accounting 

risks and auditing risks, and at the total level was high, with arithmetic mean (4.14), and standard deviation (0.53). 

This result asserts the strong relationship between creative accounting risks and auditing risks. 

The degree of all items was high. Classification of the items was, as follows:  "The higher the quality of 

auditing process, the fewer the accounting practices risks" ranked first, with arithmetic mean (4.41) and a degree 

(high). This result demonstrates the participants' agreement on the negative relationship between auditing quality 

and creative accounting practices. In other words, performing auditing process competently results in detecting and 

handling errors and fundamental irregularities, fundamentally represented in creative accounting practices, which 

positively reflect on the quality of financial reports.  

"The fewer control risks and inherent risks which the auditor conceives, the more the detection of accounting 

practices that the auditor accepts" ranked last, with arithmetic mean (3.93) and a degree (high). This result asserts 

the researcher's perspective that creative accounting risk is major part of detection risk because it is associated with 

the auditor's procedures. It also asserts the participants' agreement that there is an inverse relationship between 

detection risks, control risks and inherent risks. The fewer control risks and inherent risks, which the auditor 

conceives, the more detection risks of accounting practices that the auditor accepts.  Conversely, the more control 

risks and inherent risks, which the auditor conceives, the fewer detection risks of accounting practices that the 

auditor accepts.   To test validity of the first hypothesis, arithmetic means and standard deviations of the external 

auditors' estimates of the effect of creative accounting risks on auditing risks according to the variables (academic 

qualification, professional qualification, occupation, and experience) were estimated. 

 



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Table-6. Arithmetic means and standard deviations of the external auditors' estimates of the effect of creative accounting risks on auditing 
risks according to the study variables (academic qualification, professional qualification, occupation, and experience). 

Variable Category Arithmetic Mean Standard Deviation 

Scientific Qualification Bachelor 4.14 2.53 

Master 4.13 2.61 
Doctorate 4.21 2.32 

Professional Qualification  Saudi Fellowship 4.22 2.64 
Other Fellowships 4.13 2.52 

Occupation Auditor 4.12 2.46 

Senior Auditor 4.21 2.64 
Auditing Director 4.29 2.49 

Experience Less than five years 4.26 2.46 
5-10 years 3.98 2.65 
More than ten year 4.21 2.52 

    

Table 6 reveals significant differences in the arithmetic means of the external auditors' estimates of the effect of 

the creative accounting risk on auditing risks according to the variables of (academic qualification, professional 

qualification, occupation, and experience). The researcher used multiple ANOVA to identify whether the differences 

are statically significant or not.  

 

Table-7. Adopting multiple ANOVA to identify differences in the external auditors' estimates of the effect of the creative accounting risk on 

auditing risks according to the study variables. 

Variance Source Sum of Squares Freedom 
Degree 

Mean 
Squares 

F-Value Significance 
Level 

Scientific Qualification 2.192 2 2.295 2.337 2.715 
Professional Qualification 2.122 1 2.122 2.362 2.548 

Occupation 2.991 2 2.496 1.756 2.177 
Experience 2.687 2 2.344 1.217 2.299 

Error 37.258 132 2.282   
Total 2442.428 142    

 

Table 7 shows no statistically significant differences at the significance level (α  2.25≥ ) in the external auditors' 

estimates of the effect of creative accounting risk on auditing risks according to the variables of (academic 

qualification, professional qualification, occupation, and experience) which verifies the hypothesis validity. 

To test validity of the second hypothesis, arithmetic means and standard deviations of the external auditors' 

estimates of the external auditor's responsibility to detect creative accounting practices according to the variables of 

(academic qualification, professional qualification, occupation, and experience) were estimated. 

 
Table-8. Arithmetic means and standard deviations of the external auditors' estimates of the external auditor's responsibility to detect creative 
accounting practices according to the variables of (academic qualification, professional qualification, occupation, and experience). 

Variable Category Arithmetic Mean Standard Deviation 

Scientific Qualification Bachelor 3.89 2.59 
Master 3.71 2.63 

Doctorate 3.64 1.11 
Professional Qualification  Saudi Fellowship 3.66 2.64 

Other Fellowships 3.92 2.59 
Occupation Auditor 3.83 2.62 

Senior Auditor 3.78 2.55 
Auditing Director 3.95 2.64 

Experience Less than five years 3.78 2.66 
5-10 years 3.76 2.65 
More than ten year 3.91 2.57 

 

 

Table 8 manifests significant differences in the arithmetic means of the external auditors' estimates of the 

external auditor's responsibility to detect creative accounting practices according to the variables of (academic 



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qualification, professional qualification, occupation, and experience). The researcher used multiple ANOVA to 

identify whether the differences are statically significant or not.  

 
Table-9. Adopting multiple ANOVA to identify differences in the external auditors' estimates of the external auditor's responsibility to detect 
creative accounting practices according to the study variables. 

Variance Source Sum of 
Squares 

Freedom Degree Mean Squares F-Value Significance Level 

Scientific Qualification 2.731 2 2.366 1.216 2.365 
Professional Qualification 2.858 1 2.858 2.383 2.125 

Occupation 2.866 2 2.433 1.23 2.324 
Experience 2.238 2 2.119 2.331 2.719 

Error 47.518 132 2.362   
Total 2136.796 142    

 

 

Table 9 shows no statistically significant differences at the significance level (α  2.25≥ ) in the external auditors' 

estimates of the external auditor's responsibility to detect creative accounting practices according to the variables of 

(academic qualification, professional qualification, occupation, and experience) which verifies the hypothesis validity. 

 

12. RECMMENDATIONS 

 Provide constant concern to the external auditors' qualification and using new technologies to accomplish 

their work through delivering continuous training and educational programs for the personnel serving in 

statutory accounting offices to improve and develop their performance to match the ongoing developments of 

business. 

 The external auditor must analyze the control system and factors of creative accounting practices to prevent 

creating inaccurate financial reports whose users need to know the results of assessing their strength to 

reduce auditing risks. 

 Emphasize the importance of the external auditor's consideration of creative accounting when estimating 

auditing risks, and paying attention to his/her responsibility to detect and report them to improve the 

quality of financial reports. 

 Professional organizations should give concern to the concept of creative accounting risks, and set the 

standards and procedures that the auditor must follow to address these practices because of their negative 

effects on the reliability of the financial statements. 

 Constantly arrange prepare specialized scientific, financial, and legal conferences and seminars, and prepare 

brochures that expose creative accounting risks and their negative effects on the future of companies and 

economy and its local, regional and global reputation. 

 Encourage researchers to conduct further studies that help reveal creative accounting practices because their 

methods are constantly evolving and changing because of the established fact that human creativity has no 

limitations. 

 

Funding: This study received no specific financial support.    
Competing Interests: The author declares that there are no conflicts of interests regarding the publication 
of this paper. 

 

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