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

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