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:
- 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.
- 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.