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Creative Accounting

They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. Creative accounting is oftentimes used in tandem with outright financial fraud , and lines between the two are blurred. Creative accounting practices are known since ancient times and appear world-wide in various forms. SPEs allowed parent companies to not record some of the debt they owed as a company, since that debt belonged to the “new company.” In this way, debt contracted for the SPE could be off-balance, and not noted on the parent company’s financial records. Alternately, the parent company could funnel a part of its debt to the SPE to make its profits to debt ratio appear larger than it actually was. This was previously legal, but is now prohibited with the 2002 passage of the US Sarbanes-Oxley Act, which calls for greater transparency in financial reporting.

The right financial profile can help you secure funding, cement partnerships, and attract investors. That’s why cooking the books—a slang term for intentionally misrepresenting your company’s financial results to make them seem healthier than they actually are—is both alarmingly common and absolutely laden with the potential for financial and reputational ruin. Some cartoon books cook gin on a fry pan clip art to represent the saying cooking the books. A second revenue-acceleration tactic is called “channel stuffing.” Here, a manufacturer makes a large shipment to a distributor at the end of a quarter and records the shipment as sales. Because the goods can be returned and are not guaranteed as a sale, the manufacturer should keep the products classified as a type of inventory until the distributor has sold the product.

Usually when the manager of a business or someone involved in the accounting process for business is cooking the books it is most often for personal financial gain. The companies that are statistically the most likely to have fraudulent reporting on their books tend to have poor internal controls with very little checks and balances, and usually have a management team of questionable integrity. Most often cooking the books is accomplished by moving items that should either be on the balance sheet the income statement or vice versa. There are varieties of individual techniques that can be employed in order to lower income or raise income, raise revenue or lower revenue, and similarly either raises assets in liabilities or lower assets than liabilities. Cooking the books it’s a felonious practice and can have serious legal implications and ramifications that have sent many members of Fortune 500 companies to prison. This is the category that outlines the specific responsibilities public companies have relating to their financial statement reporting and accounting practices and internal policies.

Even if a company manages to ride out the legal ramifications of their scam, they may find themselves unable to attract or secure investors, employees, suppliers or customers. Add in the risk of tumbling stock prices, and the company may not be around long enough to apologize, let alone recover. In the Matter of Walgreens Boots Alliance Inc. et al., the SEC charged the company with misleading investors during Walgreens’ two-step merger with Alliance Boots.

People trusted that their money was being wisely invested and they were counting on that money to help them through their elder years, only to find everything had disappeared. Cooking the Books is an ongoing interview project that explores the meeting points between genre fiction and food, hosting both written word essays and podcasts. Book Bites is its easygoing cousin, where authors talk about their book and share a recipe, all in one tasty bite. Each week the NZ Herald’s Cooking the Books podcast tackles a different money problem. Today, it’s the woman who tackled $94,000 of debt in three years, and why she still side hustles now that she’s debt-free.

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