Cook the Books

Publication Date :

28 Aug, 2019

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Table Of Contents

Cook the Books Meaning

Cooks the book is used to describe the fraudulent activities performed by the corporations for falsifying their financial statements and, therefore, as a means to distort financial accounts of the firm deliberately to avoid the tax payments or hiding of the facts so that the situation of the company seems better than the actual situation prevailing.

Cooks the book is used to describe the fraudulent activities performed by the corporations for falsifying their financial statements and, therefore, as a means to distort financial accounts of the firm deliberately to avoid the tax payments or hiding of the facts so that the situation of the company seems better than the actual situation prevailing.

Cook the Books Meaning

Top Examples of Cook the Books

#1 - Lump Sum Payments Booking

The company can manipulate by recording the lump sum payments received by it in the financial year in which it is received, the service of which is to be provided in upcoming financial years. For example, Company XYZ ltd is into the business of providing different services to its clients. In the current financial year, it received $ 100,000 as a lump-sum payment from the company ABC Ltd to provide the services for the next four years, including the current year.

Now the company XYZ ltd included the whole $ 100,000 received from the ABC ltd as the revenue for the current financial year only to increase the current profits instead of amortizing it over the life of the service contract, i.e., $ 25,000 ($ 100,000 / 4) in the current year and $ 25,00 in next three years each.

#2 - Off the Balance Sheet Items

The company can manipulate financial statements
The company can manipulate financial statements with the help of off-the-balance sheet items. For example, company XYZ Ltd created separate subsidiaries to incur those expenses that the parent company is reluctant to disclose in its financial statements. It can show in the books of accounts of the subsidiary company so formed. If the subsidiaries created are separate legal entities that are not owned wholly by the parent company, then those are not required to be recorded by the parent company in its financial statements; the same can hide from the investors of the company.

Real-Life Examples of Cook the Books

Some examples where there were companies who cooked the books include the famous companies Adelphia, Enron, and Worldcom, where they claimed the existence of billions in assets in their financial records, which didn’t exist in reality.

Why do Companies Cook the Books?

These are the manipulation of the company's financial records, which is not allowed and is an illegal act. The company does it to present its better picture in front of the stakeholders or hide the facts from the stakeholders that it doesn't want them to know. It is wrongdoing, so no advantages are present in this; instead, if someone is found guilty of manipulating the company's books of accounts, it will be treated as fraud, and the person responsible can be punished for such a wrongful act.

Disadvantages

If the company cooks the books and comes to the notice, it will be treated as fraud, and the person responsible will be liable for the legal actions for such a wrongful act.
From investors' and the other stakeholders' perspectives, this type of manipulation is problematic because it will give wrong information about the company's financial health.

Important Points of Cook the Books

Many of the interesting numbers present in the company's financial statements can motivate the investors for a quick decision about the company's financial health and investment. But this should not be done as just by seeing the number, the exact idea about the company cannot be gathered. One should look into the company's financial records with due diligence to understand the company's correct picture and get satisfied that no cooking the books have been done.
Investors should read the footnotes given in the company's financial statements to get the clue for tracking down the truth of the company.

Conclusion

Thus, Cook the books is a slang term used for accounting tricks to make the company's financial results look better than actual. There are various ways to cook the books by the company, like accelerating revenues, delaying expenses, accelerating the pre-merger expenses, manipulating off-balance sheet items, manipulating the pension plans, etc. Generally, cooking the books involves financial data manipulation with the motive of inflating the company's earnings or deflating the company's expenses for the betterment of the bottom line. Despite many reform legislation from authorities in the past, the corporate misdeeds occur. There are various ways through which cook the books can be done by the company like accelerating revenues, delaying expenses, accelerating the pre-merger expenses, manipulating off-balance sheet items, manipulation in the pension plans, etc.

Looking at these items and finding the hidden items from the company's financial statements can be used as a warning sign by the investors for manipulating the earnings. However, this does not necessarily mean there is cooking the books by the company; investors should look at all the things with due diligence before making any investment in the company he decides to invest in.