https://planergy.com/blog/cooking-the-books/ 1 / 8 What Is Cooking The Books? Definition and Examples Like people, companies like to put their best foot forward—even if that means playing fast and loose with the truth on occasion. The right financial profile can help you secure funding, cement partnerships, and attract investors. As a result, the temptation to, ah, “massage the truth” is ever-present. 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. Fortunately, identifying and understanding the most common ways companies choose to cook their books, along with an investment in the right technology and practices, can help you avoid running afoul of the law or damaging your
Transcript
https://planergy.com/blog/cooking-the-books/1 / 8
What Is Cooking The Books?Definition and Examples
Like people, companies like to put their best foot forward—even if that meansplaying fast and loose with the truth on occasion. The right financial profile canhelp you secure funding, cement partnerships, and attract investors. As a result,the temptation to, ah, “massage the truth” is ever-present. That’s why cooking thebooks—a slang term for intentionally misrepresenting your company’s financialresults to make them seem healthier than they actually are—is both alarminglycommon and absolutely laden with the potential for financial and reputationalruin.
Fortunately, identifying and understanding the most common ways companieschoose to cook their books, along with an investment in the right technology andpractices, can help you avoid running afoul of the law or damaging your
The Dangers of Cooking the BooksWhen companies make the choice to lie about their financial statements in orderto increase reported earnings while decreasing reported expenses (and therebyimproving their bottom line), that’s cooking the books.
While it might seem like a quick and easy shortcut, the truth is this kind of“creative accounting” exposes a company to devastatingly high levels of risk.Consider these dangers:
Corporate fraud is a crime. Both the parent company and the person(s)directly responsible for altering the financial records will likely suffersubstantial penalties if caught, including fines, prison time, and even theshuttering of the company itself.Corporate misdeeds can sour public perception and professionalreputation permanently. Even if a company manages to ride out the legalramifications of their scam, they may find themselves unable to attract orsecure investors, employees, suppliers or customers. Add in the risk oftumbling stock prices, and the company may not be around long enoughto apologize, let alone recover.
“The dangers of cooking the books are hardly news to anyone who’s heard thesordid tales of companies like Enron, Adelphia Communications, andWorldcom—fallen titans whose corporate misdeeds devastated lives, sentexecutives to prison, created widespread financial ruin for investors, andcaused the companies themselves to implode.”
Common Ways Companies Cook the BooksThe dangers of cooking the books are hardly news to anyone who’s heard thesordid tales of companies like Enron, Adelphia Communications, andWorldcom—fallen titans whose corporate misdeeds devastated lives, sentexecutives to prison, created widespread financial ruin for investors, and causedthe companies themselves to implode. Worldcom in particular set records as oneof the very largest bankruptcies in United States history.
In the United States, legislation like the 2002 Sarbanes-Oxley Act (SOX) wasdirectly inspired by the need for reform in the wake of Enron and other scams.Designed to shield investors from accounting fraud, SOX instituted severalimportant protections, including:
Stricter corporate governance regulations, including the creation of thePublic Company Accounting Oversight Board (PCAOB) to actively monitorcorporate accounting practices.Eliminating fraud-friendly loopholes in common accounting practices.Strengthening requirements for both financial disclosures and corporateaccountability, including increased accountability for executives, auditors,and accountants.Tightening transparency requirements for corporate financial reporting.Stronger protections for whistle-blowers.Increased compliance monitoring.Larger financial and legal penalties for malfeasance perpetrated bycorporations and their executives.
Yet despite reform legislation like SOX, companies continue to search for, andindulge in, financial sleight of hand in search of maximum gain for minimal effort.Some of the ways companies continue to perpetrate this kind of fraud include:
Credit SalesWhen a customer buys goods or services on credit, they can be recorded as saleseven if the customer’s credit terms allow them to delay payment for 90 days, sixmonths, etc. Companies offering their own financing programs to customers canextend credit terms, too. The result? “Sales” that hit the balance sheet as (false)net income, while the buyer’s funds are still safely nestled in their bank accounts.
Playing Fast and Loose with ExpensesCompanies can manipulate their expenses in a few different ways to pump uptheir financial statements.
Delayed Expenses, which aren’t recorded as costs when they’re actuallyincurred. Telefonaktiebolaget LM Ericsson, the Swedish electronics firm,was caught delaying expenses—to the tune of nearly a billion dollars—in2018.Accelerated Pre-Merger Expenses involves a company about to beacquired in a merger paying, or even prepaying, all the expenses itpossibly can before the merger occurs. When the merger is finalized,these expenses will be on the books for the period before the merger—andearnings per share for the stock of the newly created company will seemmuch healthier.Non-Recurring Expenses are single, one-time charges connected tounusual events, intended to provide a company’s investors with greaterinsight into operations. Some companies may skirt the line of proprietyand legality by making these “extraordinary” expenses a standard part oftheir yearly budget, then claim they overdid it and return part or all of thecharges to income once at their convenience.“Other” Expenses and Income is a broad, bland, and infinitely
exploitable category where companies can conceal expenses by offsettingthem against income from (for example) the sale of equipment.
Pension PlansWhile employees may enjoy having a benefit plan to build a retirement nest egg,companies can also manipulate pension plans to boost earnings by lowering theplan’s reported expenses. The scheme here is to report the investment gainsgenerated by the plan’s assets as revenue.
Keeping Your Books Compliant, NotCookedKeeping corporate fraud and other creative accounting problems at bay can bechallenging, especially if your current business processes are too opaque andlabor-intensive for you to spot the warning signs.
Choosing to invest in a comprehensive procurement solution like PLANERGY canhelp. Connecting procurement to accounting and centralizing the capture,organization, and analysis of all financial data makes it a lot easier to spotpotential problems before they become catastrophes.
Using process automation and leveled access to data, you can create a closeddatasphere where all purchases are routed through the system, all payments andexpenses are recorded, tracked, and available to review from dashboards ondemand, along with advanced financial reporting and analysis.
Audit trails are automatic, and built-in compliance measures like automatic three-way matching, leveled account access to critical accounting information, andadvanced process management for approval workflows ensure that your financial
A Recipe for Financial ComplianceAccurate and complete financial records aren’t just good business—they’reessential to your company’s ongoing health, reputation, profitability, andcompetitive performance. You can make sure your financial records are audit-ready by establishing rigorous review practices, monitoring your accountsregularly, and making automation and artificial intelligence part of youraccounting software environment. With a little preparation, the right tech, and acommitment to integrity and honesty, you’ll be able to rest easy knowing yourcompany’s books are anything but cooked.
Find Out How
Ensure Your Financial Records areComplete, Accurate, and Compliantwith PuchaseControl.
PurchaseControl is cloud based procurement software for business spend management. We empower businesses by providing greater transparency and oversight into the purchasing process. With PurchaseControl, you have the flexibility to manage how spend actually happens instead of how you wish it would happen.
The entiThe entire PurchaseControl team has experience within a range of businesses, and as such, we bring a practical, holistic approach to purchasing. We understand what it takes to run a business and apply that knowledge to make PurchaseControl as effective as possible for all users.
