Analyzing How Businesses Cook The Books With Reference For Real World Cases

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Introduction There is no such thing as a perfect business. Although many enterprises express the illusion that they internal workings are flawless, the majority of them are being torn apart from within. This can be through many different ways, but all end in a hefty court case, possible bankruptcy or similar punishments which are associated with financial crimes. One such crime is the manipulation and misrepresentation of financial statements of a business, to hide expenses, improve earnings per share (EPS) or to attract new investors. This is known as financial statement fraud or colloquially labelled “cooking the books”. (Grossman St Amour, 2014) These crimes can have a significant impact on the business, as their stock could be driven…show more content…
However, any type of fraud is a crime and therefore must be dealt with accordingly. The most common varieties of financial statement fraud are: Improper Revenue Recognition Recording revenues before a sale is made, or before payment has been received seems like a feeble way to alter the books, but the method is highly effective and can accumulate to large sums of money over the long term. Listing items which are not sales, as sales, or resending tax invoices to debtors (to renew the terms and improve the accounts receivable account) in order to boast revenues which are yet to exist is the most common method of financial statement fraud. In fact, a study showed that 38% of the 403 cases involved this type of fraud. (Bradford C, 2014) Manipulating Expenses or Liabilities Businesses can also remove some accounts and reinsert them somewhere else in order to increase EPS or reduce tax liability. This can be done by listing expense accounts as capital acquisitions, thus, essentially listing ordinary debited expenses as credited owner’s equity and in turn falsely boosting profits. Other methods of manipulating accounts involve excluding accounts payables from the books altogether to reduce liability. The same fraud is also performed with loans and other short term liabilities by listing them as non-current, improving the equity of the business and increasing the share price. (ACFE, 2014) This was the method of fraud implemented in the WorldCom scandal, which is still
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