In our previous blog post, we covered what is meant by the term “cooking the books”. Today, we’ll look at how companies fudge the figures. To start things off, here’s a basic list:
Accelerating revenues
What it is:
Booking lump-sum payment as current sales when services are actually provided over a couple of years.
Pension plans
What it is:
If a company has a predetermined benefit plan, it can use special techniques to smooth earnings.
Delaying expenses
What it is:
Under certain circumstances, companies are allowed to delay recognising expenses on their income statements. Recently however, they started to delay expenses by capitalising on them.
Synthetic leases
What it is:
A synthetic lease is used to keep the cost of new building from appearing on a company’s balance sheet.
Non-recurring expenses
What it is:
“Nonrecurring expenses” is the generic term used for one-time charge-offs. The occurrence of non-recurring expenses became more (well, for lack of a better word) recurring. In the 90s, it was such a common occurrence that authorities had to take note and had to factor it when checking company credit reports.
Other income or expenses
What it is:
Defines all revenue and expenses that aren’t classified in major line items or aren’t large enough to be “material” in the eyes of executives. Pretty vague description, isn’t it? Which is exactly why it’s loved by creative accountants.
Off balance item sheets
What it is:
As Richard J. Wayman explains, off balance sheet accounting are the methods a company uses to remove assets and liabilities, as well as income and expenses, from its balance sheet and income statement.
A final word
To be honest, most companies gloss up their financial reports in order to please stakeholders and stay afloat in the stock market. However, be on the lookout that you don’t do business with a company that, to put it crudely, is merely a polished turd.
