That accountant is Ren Carlton, CPA, CSMC and “native Michigander.” Although Ren is hesitant to broach the subject because, “this information can be abused to defraud investors and cheat on taxes.” Who knew?!?
Despite that caveat, Ren has decided that sharing this information is too critical to be kept to himself, “I have decided that lega s is a critical skill for attracting investors and lenders, as well as satisfying the occasional customer or vendor requests.”
Okay then! So if we understand correctly, the rationale here is that cooking the books is sort of like drinking alcohol. In moderation, it’s fine and sometimes even the right thing to do but if you abuse it, you start making an ass out of yourself and probably some bad decisions that could lead to, ya know, jail.
But wait, do you really even know what “cook the books” means? You may be under the cockamamie notion that it’s a bad thing. Well, it’s not and Ren explains it for us:
Cooking the books (also known as creative accounting and earnings management) are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers toward the interpretations desired by the authors. The terms “innovative” or “aggressive” are also sometimes used.
See? Cooking the books just doesn’t follow the “spirit of those rules,” it’s not breaking the rules. Strangely enough, Ren’s definition is strangely similar to this Wikipedia entry for creative accounting:
Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms “innovative” or “aggressive” are also sometimes used.
Cooking the books, creative accounting – they’re the same right? Close enough, anyway. Now that the semantics are out of the way, what other words of wisdom can we get from Ren? How about an example of acceptable book cooking? Say, revenue recognition:
One example of cooking the books is acceleration of revenue recognition. This tactic is used to recognize revenue before it is considered earned by GAAP (Generally Accepted Accounting Principles). Methods for accelerating revenue include recognizing sales that are not yet earned or complete. Another method is to book sales that are actually earned in another period (e.g., recognizing January 2011 sales on your 2010 income statement). Flagrant abuse of the Revenue Recognition Principle includes backdating sales and fabricating fictitious sales.
How are you going to impress that bank with your revenue numbers if you ram in some revenue from a future period? What if you need another investor to help you reach the next stage of your business? It’s your God-given right to present them with phony numbers in order to get them on board. This is America, people. Don’t let the spirit of GAAP hold you back!
