The Seven Key Ways Businesses Cook Their Books
Dr. Howard Schilit, who has studied accounting shenanigans for his entire career, says that this chart summarizes every accounting trick he’s ever seen.
One: Recording Revenue Too Soon or of Questionable Quality
- Recording revenue when future services remain to be provided
- Recording revenue before shipment or customer’s unconditional acceptance
- Recording revenue although customer is not obligated to pay
- Selling to an affiliated party
- Giving customer something of value as a quid pro quo
- “Grossing-up” revenue
Two: Recording Bogus Revenue
- Recording sales lacking economic substance – side agreements
- Recording cash received from lender as revenue
- Recording investment income as revenue
- Recording as revenue supplier rebates tied to future required purchases
- Release revenue improperly “held back” before a merger
Three: Boosting Income With One-Time Gains
- Recording gains by selling assets recorded at deflated book value.
- Including investment income or gains as revenue.
- Including investment income as reduction in operating expenses.
- Creating income by reclassification of investment gains.
Four: Shifting Current Period Expenses to a Later or Earlier Period
- Capitalizing normal operating costs, particularly if recently changed from expensing
- Changing accounting policies and shifting current expenses to a later period
- Amortizing costs too slowly
- Failing to write-down or write-off impaired assets
- Releasing asset reserves into income
Five: Failing to Record (or Improperly Decreasing) Liabilities
- Failing to record expenses (and related liabilities) when future obligations remain
- Reducing liabilities by changing accounting assumptions
- Releasing questionable liability reserves into income
- Creating sham rebates
- Recording revenue when cash is received, yet future obligations remain
Six: Shifting Current Revenue to a Later Period
- Creating reserves and releasing them into income in a later period
- Improperly holding back revenue just before an acquisition closes
Seven: Shifting Future Expenses to the Current Period (as a One-Time Charge)
- Improperly inflate amount included in special charge
- Improperly write off in-process R&D costs from acquisition
- Accelerating discretionary expenses into the current period