How Companies Cook the Books? Part 1

[Nitin Bhatia]

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How Companies Cook the Books is a million-dollar question for the investors. The investor who does not have basic knowledge of finance may not be able to find out from the financial statements or balance sheet. The three most common questions in the mind of investors are
1. Why companies cook the book of accounts?
2. How it is done?
3. How we can find out such practices?

This is a 2 part video series, where we will find out the answer to these questions. In today’s video, we will discuss the first two questions and the third one is discussed in the second part of this series.

There are 3 possible reasons why the company cook their accounts book
1. Due to stiff competition, the company has to stay ahead and as we know that the golden rule of this world is “Survival of the fittest”. The company works hard to meet the expectations of the market to retain the interest of the investors.

2. To maintain consistent growth, sometimes company under-report its financial performance.

3. Lastly, the dishonest management cooks the books for their vested interest like a hike in salary, bonus or to pledge the shares at a higher price.

Now the next question is how it is done?
1. Cross entry in the book of accounts of sister concern
2. Advance Revenue Booking
3. Investment income is shown as revenue
4. Sale of assets is shown as revenue
5. Depreciation method
6. Operating expenses are reported under capital expenditure
7. Lastly, financing cash flow is reported under operating cash flow

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