Cook the books definition
/What is Cook the Books?
To cook the books involves using accounting trickery to enhance an organization’s financial results. This can involve either artificially inflating sales or reducing expenses. Alternatively, one might 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. Several ways to cook the books are noted below.
Leave Books Open
A common cooking the books practice is to leave the books open past the end of the month to record additional sales within the prior reporting period. This practice is easily detected by auditors, by examining transaction dates.
Avoid Expense Recognition
Another common practice is to not record expenses in the proper reporting period, even though they clearly reflect resource consumption in the period. Instead, recognition is delayed until the following period. This practice can be detected by reviewing supplier invoice dates.
Incorrect Expense Reserves
A more subtle cooking the books practice is setting up expense reserves, such as the allowance for doubtful accounts, that do not reflect the actual loss rate. This can be detected by comparing the size of the allowance to the average age of all outstanding receivables; When the average age increases, it is likely that bad debts are not being recognized.
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Misidentify Consignment Sales
A business might record consignment sales as though they are actual sales. This means that the full amount of the sale is recognized, rather than just the commission on the sale.
Cookie Jar Charge
A business might take 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.
Channel Stuffing
An organization could engage in channel stuffing to sell substantially more goods to its distributors and retailers, usually at discounted prices or with a promise to extend the required payment interval. This typically occurs near the end of the year, in order to artificially boost reported sales and profits. By doing so, management can qualify for year-end bonuses. The following year’s results will suffer from this practice, as sales in the following quarter typically slump, while the distributors and retailers struggle to sell off their excess stocks. It is also quite common for the organization to experience unusually high product returns in later periods, when distributors and retailers conclude that they cannot sell the excess goods at all, and dump them back on the seller.
Higher Customer Credit Levels
A business could 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.