Cook dinner the actual books. Obtain your own food
Understanding Financial Statements
If these subsidiaries are set up as separate legal entities that are not wholly owned by the parent, they do not have to be recorded on the parent’s financial statements and the company can hide them from investors. Every company manipulates its numbers to a certain extent to make sure budgets balance, executives score bonuses, and investors continue to offer up funding. However, factors such as greed, desperation, immorality, and bad judgment can cause some executives to cross the line into outright corporate fraud.
This category was developed coincide with legal regulations and makes the destruction of financial documents and the creation of fraudulent documents that would aid in the deception of any federal investigations a felony crime. Term whistleblower refers to anybody who helps disclose any fraudulent information regarding the transactions and reports for publicly traded companies. Previously being a whistleblower was in a way de-incentivized because it lacked many of the legal protections that it now has from tortious and criminal litigation. Many of the interesting numbers present in the financial statements of the company can motivate the investors for a quick decision about the financial health of the company and investment. But this should not be done as just by seeing the number, the exact idea about the company cannot be gathered.
Enron, Adelphia, and WorldCom are extreme examples of companies who cooked the books claiming billions in assets that just didn’t exist. Companies can manipulate their financial records to improve their financial results using a multitude of tactics. Some companies don’t record all of their expenses that incurred in a period until the next period. By recording a portion of Q1’s expenses in Q2, for example, a company’s Q1 earnings or profit will look more favorable. They want to show high revenues and profits so that investors remain committed to their company. When such is the case, they may practice cooking the books by purposefully altering financial accounts to show the company is performing much better than it really is.
When companies make the choice to lie about their financial statements in order to increase reported earnings while decreasing reported expenses , that’s cooking the books. In SEC v. Celadon Group, Inc., truckload shipping company Celadon engaged in fraudulent third-party transactions to overstate income and earnings and avoid recognizing at least $20 million in impairment losses and charges. This accounting scandal resulted in the company significantly overstating its pre-tax and net income and earnings. In SEC v. Putnam et al., the commission charged Anicom Inc. and its directors with violating federal securities laws after the company falsely reported millions of dollars of nonexistent sales to inflate net income by more than $20 million.
Italian dairy giant Parmalat employed a number of creative accounting and wire fraud schemes before 2003 that lead to the largest bankruptcy in European history. It sold itself Credit-linked notes with the help of Merrill Lynch through a Cayman Islands special-purpose entity and over-accounted for their value on the balance sheet. The publicly listed company stated to investors that it had about $2Bn in liabilities , but once audited more vigorously during the bankruptcy proceedings, it was discovered that the company’s debt turned out to actually be $14.5Bn. This massive debt was largely caused by failed operations in Latin America and increasingly complex financial instruments used to mask debt—such as Parmalat “billing itself” through a subsidiary called Epicurum. It was also discovered that its CEO Calisto Tanzi had ordered the creation of shell accounts and diverted 900M Euros worth into his private travel company.
That’s because the purchases customers make on credit can be booked as sales even if the company allows the customer to postpone payments for six months. In addition to offering in-house financing, companies can extend credit terms on current financing programs. So, a 20% jump in sales could simply be due to a new financing program with easier terms rather than a real increase in customer purchases. These sales end up being reported as net income or profit, long before the company has actually seen that income—if it ever will. Practiced by some Hollywood film studios, creative accounting can be used to conceal earnings of a film to distort the profit participation promised to certain participants of the film’s earnings.
The SEC alleged Anicom included in its financial statements millions of dollars in sales to a fictitious customer, SCL Integration. Perhaps the company is engaging in outright fraud and wants to hide the fraud from the general public, so they hatch a scheme to “cook the books”. Perhaps the CEO and CFO’s earnings are attached to the financial performance of a company, so they hatch a scheme to “cook the books” in order to increase their own personal compensation. AOL viewed this marketing campaign as a long-term investment and capitalized the costs —that is, it transferred them from the income statement to the balance sheet where the campaign would be expensed over a period of years. The more conservative treatment is to expense the cost in the period the CDs were shipped. Some companies manipulate their accounting practices to paint a rosier picture when it comes to their financials.
A Yonkers woman has admitted cooking the books to steal almost $250,000 from her Tarrytown employer, officials said. Delayed Expenses, which aren’t recorded as costs when they’re actually incurred. Telefonaktiebolaget LM Ericsson, the Swedish electronics firm, was caught delaying expenses—to the tune of nearly a billion dollars—in 2018. The company that buys Smith’s business agrees to let Smith and his accountant continue to run the company . Perhaps one small indiscretion at a company has transformed itself into a full-blown “cooking of the books” as the company tries to hide something from its past.
In SEC v. Penn West Petroleum Ltd. et al., Penn West, a Canadian-based oil and gas company, agreed to pay $8.5 million in civil penalties for fraudulently moving hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This accounting fraud artificially reduced the company’s operating costs by as much as 20 percent in certain periods. The object of the scheme was to deceive investors about a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil.
In 2014, the Bermuda deal with Dutch authorities expired, and Nike shifted the profits to another offshore subsidiary, a Netherlands-based Limited Liability Partnership . Through a Dutch tax loophole, CV’s owned by individuals that are residing in the Netherlands are tax-free. Exploiting this structure saved Nike more than $1Bn in taxes annually and reduced its global tax rate to 13.1%; the company is currently being pursued for billions of dollars worth of back taxes in litigation by multiple governments for this multinational tax avoidance. The balance sheet can improperly inflated by increasing assets or equity through the reporting of gains on the exchange of similar assets. The income statement can be improperly inflated by lowering costs or expenses through depreciating assets too slowly.