The expression “cook the books” refers to the practice of arranging company financials in a manner that tends to call attention to positive data but obscures or greatly minimizes the ability to identify negative data. As a result, this type of creative accounting helps to present a false image of the true nature of the company’s financial condition. While most companies that choose to cook the books make it a point to stay barely within the legal restrictions that relate to keeping company records, there are instances where information is omitted or falsified as part of the process.
There are several reasons why a business may choose to cook the books. One motive is to secure additional funding in order to maintain or expand the business. To that end, the business may develop a set of company books to show prospective lenders or investors. The data is arranged so that the business appears to be more profitable and stable than properly organized accounting records would indicate.
A company may choose to cook the books in an attempt to improve financial status perceptions within the business community. For example, the corporation may make public data that spotlights the sales figures for a recent period, while failing to indicate how operating and raw materials expenses cut deeply into the revenue generated from those sales. The figures may also fail to note how much of those sales are currently classified as over 120 days in arrears or as bad debt.
In order to keep penalties and possible legal action to a minimum, it is usually necessary to cook the books in a manner that follows the actual letter of standard accounting practices, while overlooking the intent of those basic and common rules. Taking care to follow this pattern makes it easier to prove that a particular line item in the financial data is in fact accurate, although there may be some difference of opinion on how and where in the company financials the data is recorded.
It is important to note there is a great deal of difference between companies that deliberately choose to cook the books and businesses that unintentionally fail to follow proper accounting guidelines. In the former, there is the intention of presenting a false perception of the true state of the corporate accounting. By contrast, the latter is not attempting to hide anything, but lacks the organization and the skills to maintain the financial data properly. Usually, there is little effort required to tell the difference between these two situations.
