Financial fraud: how to cook the books?

Why do we hear so regularly that some firm has messed with their bookkeeping and financial statements? Simple: there are many good reasons for financial fraud! For instance:

• If your bonus depends on a certain profit level, you can feel tempted to “produce” that profit level, when it is just below what it should be.
• Or when you are just below a certain liquidity level, you can be tempted to “produce” the required level, as not to violate a loan contract.
• Similarly, you can want to meet shareholder promises, or
• Avoid a market judgment of under-performance, or
• Reduce tax obligations, et cetera.

There are many reasons to tweak your financials in relation to some benefit. So … HOW TO DO THIS? Here’s a very brief overview of HOW TO COOK THE BOOKS.

So in short, you can exaggerate or downplay numbers to accomplish financial fraud. And you can do this in the Profit & Loss statement, or in the Balance Sheet. Concrete practices of how to do this are e.g.:

• booking a lead (somebody who has shown interest) already as “sold”
• lengthen an amortization term of goodwill, so that the costs in the remaining years are lower
• keep a loan out of the books of the company you are reporting about
• not writing off a debtor whilst knowing you won’t get paid …

Many concrete things you can do to reach one of the effects as the table highlights. Obviously this is wrong or even unethical. But it helps to know that there simply “are” good reasons to do it, and this is often related to incentives of reward or punishment that a company chooses to adopt. So this insight helps you see how a company and its management system can be prone to financial fraud in certain directions, and now you know where and how they might do it.