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“Cooking the books” is the practice of manipulating company finances to present a false picture of the true financial situation. Companies may do this to secure additional funds or improve perceptions of financial status, but must stay within legal restrictions. There is a difference between intentional manipulation and unintentional mistakes.
The expression “cooking the books” refers to the practice of organizing company finances in a way that tends to draw attention to positive data, but greatly obscures or minimizes the ability to identify negative data. As a result, this type of creative accounting helps present a false picture of the true nature of the company’s financial situation. While most companies that choose to cook the books make a point of staying just within the legal restrictions related to keeping company records, there are cases where information is omitted or falsified as part of the process. .
There are several reasons why a business may choose to cook books. One reason is to secure additional funds to maintain or expand the business. To that end, the company may develop a set of company books to show to potential lenders or investors. The data is arranged in such a way that the business appears to be more profitable and stable than properly organized accounting records would indicate.
A company may choose to cook the books in an attempt to improve perceptions of financial status within the business community. For example, the corporation may make public data that highlights sales figures for a recent period, but does not indicate how raw material and operating expenses profoundly reduce the revenue generated from those sales. The numbers may also fail to note how much of those sales are currently classified as more than 120 days past due or bad debt.
To keep penalties and potential legal action to a minimum, it’s usually necessary to cook the books in a way that follows the actual letter of standard accounting practices, while ignoring the intent of those common ground rules. Being careful to follow this pattern makes it easier to demonstrate that a particular line item in the financial data is indeed accurate, although there may be some difference of opinion about how and where in the company’s financial data the data is recorded.
It is important to note that there is a big difference between companies that deliberately choose to cook the books and companies that do not intentionally follow proper accounting guidelines. In the first, there is the intention to present a false perception of the true state of corporate accounting. On the contrary, the latter does not try to hide anything, but lacks the organization and skills to maintain financial data correctly. It usually takes little effort to tell the difference between these two situations.
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