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Top 10 Ways Companies Cook The Books

The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. That chick is kind of cute, but I think she’s cooking the books a little with that shirt. The year 2002 saw the end of an era of skyrocketing stock prices and booming businesses. Companies that we previously thought of as unstoppable didn’t have the earnings they told us they did. The State prosecutor in the trial of Independent TD Michael Lowry for tax evasion has said it was a case of the accused and his company “cooking the books, not just once but twice”.

As previously stated the income statement and the balance sheet are the financial statements that are most often involved in cooking the books. What is known as convenient cooking means the exchanging of assets with the sole purpose to inflate the balance sheet and show a profit on the income statement simultaneously. An example of this would be if the company owns an old commercial building that has been valued on the books at $200,000, which is its original cost minus the years of accumulated depreciation. The fact is that a piece of property like that likely has a present value 10 times greater than what would be reported therefore if the company were to sell the warehouse it can report a $1.5 million profit and then turn around and by another piece of property for $2 million. In reality almost nothing has actually changed because the company still has a warehouse but the key is the new one is valued on the books at the purchase price of $2 million as opposed to the original lower depreciated cost of the old warehouse. Doing this allows the company to put a $1.5 million gain on its books however it has less cash on hand Bennett had before the buy-sell transaction took place.

“Creative accounting” has been at the root of a number of accounting scandals, and many proposals for accounting reform—usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added. A metaphor based on cooking, whereby ingredients are changed, altered and improved. Thus financial statements can also be so modified to the benefit of the “cook”. Cooking the Books is when a company fraudulently misrepresents the financial condition of a company by providing false or misleading information. For example, Enron was accused of, basically, cooking its books, fraudulently pumping up the company’s value by concealing massive amounts of debt in an array of complex partnerships set up by Enron officers.

Many companies who sell their product, extend terms to their customers, which allows them to pay the company at a later date. These sales are recorded as accounts receivables since they represent product that’s been sold and shipped, but the customers have yet to pay. Companies can falsify their AR by claiming that they made a sale and record the accounts receivable on the balance sheet. If the fake receivable is due in 90 days, the company can create another fake receivable 90 days from now to show that current assets remain stable. Only when a company falls behind collecting its receivables will it show that there’s a problem.

Rick Wayman has 37+ years of experience in the financial industry, specializing in analysis, financial management, and stakeholder communications. Enron was a U.S. energy company that perpetrated one of the biggest accounting frauds in history. Pump-and-dump is a manipulative scheme to boost the price of a security through fake recommendations based on false, misleading, or exaggerated statements. Cost of goods sold is defined as the direct costs attributable to the production of the goods sold in a company. Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business.

However there are exceptions and sometimes fraud and deceptive practices are committed. Examples of the types of fraud misused assets, illegal payments made by a business, the concealment of financial losses, under reporting of expenses, over recording revenue, etc. This article is designed to show you methods cooking the books, not to facilitate you in preparing fraudulent financial reports but rather to help you be able to spot signs of fraud in a business and its financial reports.

You can make sure your financial records are audit-ready by establishing rigorous review practices, monitoring your accounts regularly, and making automation and artificial intelligence part of your accounting software environment. With a little preparation, the right tech, and a commitment to integrity and honesty, you’ll be able to rest easy knowing your company’s books are anything but cooked. Keeping corporate fraud and other creative accounting problems at bay can be challenging, especially if your current business processes are too opaque and labor-intensive for you to spot the warning signs. Both the parent company and the person directly responsible for altering the financial records will likely suffer substantial penalties if caught, including fines, prison time, and even the shuttering of the company itself.

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