What is the Controller’s Cushion?

The controller's cushion refers to the deliberate overstatement of expenses early in the year, so that the controller has a favorable expense buffer that can be drawn down later in the year. This cushion is usually created for estimated expenses, such as accrued bonuses, the bad debt reserve, the obsolete inventory reserve, and the warranty reserve.

If the actual financial results later in the year begin to decline, the controller then adjusts these expense reserves downward, thereby reducing expenses and resulting in an overall improvement in financial results.

Problems with the Controller’s Cushion

The use of a cushion is not good practice, since it tinkers with the actual results of a business. Still, the concept is commonly employed in organizations where investors value extremely consistent earnings levels. The problem is that the use of a cushion misrepresents the actual financial results of the reporting entity, since it hides fluctuations in its actual performance that might lead investors to sell off their holdings.