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Creative accounting is a continuum, not a binary. It runs from aggressive but permitted choices inside GAAP's flexibility, through misapplied estimates, to outright fraudulent misstatement. Because the same motive (managing reported results) drives every point on the spectrum, an analyst should read legal-but-aggressive choices as early signals of later, more serious manipulation.
Compare operating cash flow with net income over several periods. When earnings grow persistently faster than operating cash flow, profits are being driven by accruals such as rising receivables, inventory, or capitalized costs rather than cash collection. A widening gap flags possible premature revenue recognition or deferred expenses.
Income statement manipulation must leave traces on the balance sheet, because every inflated revenue or deferred expense has an offsetting entry. Unusual growth in receivables relative to sales (rising days sales outstanding), inventory relative to cost of sales, or capitalized costs relative to assets shows where earnings were borrowed from. Analyzing balance sheet ratios therefore exposes what the headline earnings number hides.