Cook the books

To cook the books means that the managers of a business are deliberately falsifying certain aspects of its financial statements to give investors a false impression of the true state of the business. Alternatively, they engage in business practices to enhance financial results that are technically legal, but which will have a negative impact on the business over the long term. A number of techniques can be used to cook the books, such as the following:

Falsification activities

  • Leaving the books open past the end of the month to record additional sales within the prior reporting period.
  • Not recording expenses in the reporting period, even though they clearly reflect resource consumption in the period.
  • Altering the terms of leasing arrangements so that the liability appears to be held by a third party, thereby keeping the liability off the entity's balance sheet.
  • Falsely recording pension liabilities lower than is really the case.
  • Setting up expense reserves, such as the allowance for doubtful accounts, that do not reflect the actual loss rate.
  • Recording consignment sales as though they are actual sales.
  • Taking a one-time charge that is set up as a "cookie jar," which can be used in subsequent periods to write off expenses and artificially inflate profits.

Business practices

  • Engage in channel stuffing to sell more goods to customers than they can realistically use.
  • Grant much higher credit levels to customers in order to boost sales, even though the customers may not be able to pay off the receivables.

Related Courses

Fraud Examination 
Fraud Schemes 
How to Audit for Fraud