When Numbers Don’t Add Up

CHAPTER 4

“Cooking the Books”

There are four techniques of executing accounting fraud:

1. 1.INCREASE INCOME, e.g., premature sales recognition
2. 2.DECREASE EXPENSES, e.g., capitalization of interest
3. 3.INCREASE ASSETS, e.g., enhance goodwill
4. 4.DECREASE LIABILITIES, e.g., off the balance sheet financing

The following mini-case studies cover these techniques.

Earnings Management

Scott Dalton is the CEO of ABCD Inc. and is reviewing the draft financial statements a month before the year-end.

Income Statement for the Year Ended December 31, 2021

$
Sales revenue	1,230,000
Less: cost of sales	61,000
Gross profit	369,000
Less: overhead expenses and depreciation expense	345,000
Net income	24,000

Balance Sheet as at December 31, 2021