ACCOUNTING NOISE 4: Cooking the Books
A company who has had a poor performance resorts to “accounting noise” to make it look better than it really is (e.g., Enron, WorldCom, etc).
In addition to fudging revenue figures (recording future / potential income that may or may not actually be realized) and fudging expense figures (postponing the recording of expenses into the future), one other common practice has to do with accounts receivable and notes receivable.
Before audit time, the company “sells” the over-aged receivables (in arrears for more than 90 days or notes in default) to a finance company or an affiliate with an agreement to “buy back” the receivables at some future time (usually, after audit time or when audited financial statements have been finalized). The conspiring finance company / affiliate gives its own promissory note or acknowledges a payable to the fudging company.
Voila! The Balance Sheet will look healthy because it will have accounts and notes receivables that are current. It will also enable the company to avoid putting up a provision for bad debts which is reflected as an expense.
Image from Microsoft Clipart
Tags: accounting fraud, Accounts Receivable, Balance Sheets, Enron, notes receivable, WorldComRelated Stories
POSTED IN: Accounting Concepts, Accounting for NonAccountants, Accounts Receivable, Assets, Credit Standing
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