The Good, the Bad, and the Ugly — How Truthful Are Your Books?

You’re a company director. You’ve made promises and projections in the annual shareholders meeting. Now, one year later, you have to face shareholders and show that you’ve been running the company profitably. Not easy.

This is where accountants may lend you a hand. Unfortunately, this isn’t always a good idea. Some of the tricks they use aren’t strictly illegal, but neither would they hold their heads up high and discuss them openly.

How do you tell if your accountant has loyally taken matters into their own hands? Here are some of the tricks they have up their sleeves, and how such tricks can harm your business.

Declaring sales in advance

Some companies are careful and declare their sales once they’ve been completed. Others bring the sales forward before they’ve been completed, painting a misleading picture of the company’s progress as regards income versus liabilities.

This is a double-edged sword if the company is seeking investors. Technically, the company is giving a false account of its progress — an account upon which investors are basing their decision of whether to invest (or not).

These figures suggest that the company is doing much better than it is. Of course, if word gets out that the company has been deliberately mis-accounting, its share prices will tumble and finding further investors will become difficult. Investment is about confidence — trust is something which is difficult to build.

Transferring values to the wrong part of company accounts

Accountants can do this in seemingly infinite ways. Infamously, WorldCom did this by declaring some of its expenses as part of its assets, meaning that it had higher business costs than it declared and had artificially increased its value, which was (and is) outright illegal.

While on the subject of expenses, make sure that your business expenses really are business expenses. Business trips to Africa or the Middle East may count, whereas including a personal loan to furnish your house or pay for the family holiday will land you in trouble.

Another way they may do this is with purchased goodwill, which, like other assets, depreciates. However, some companies deliberately overestimate the useful life of goodwill to depreciate over more than 20 years, softening the impact on the profit and loss account (and making the directors look like corporate wizards). It’s something of a gray area.

Overvaluing assets

This is a road you should never go down. One way companies that choose to is by overvaluing their inventory. The balance sheet may look good, but savvy investors can spot this easily by looking at the profit and loss account. Just how is inventory growing faster than the sales? In fact, why is it amounting to more value than the company’s total assets? It’s an investigation waiting to happen, so keep your eye on the accounts and prevent it.

As you can see, even in accountancy, which deals with specific figures, there’s room for creativity. Unfortunately, you might not appreciate it if you’re an investor. Even if you’ve done nothing wrong, if you’re a director you still won’t want the financial authorities becoming interested in your accounts — remember how the stock exchange reacts to these things. Then there’s also the plain illegal — neither will appreciate that. The best way is to do things by the book — that’s really keeping the books.

For more information on accountancy practices and ethics, you can visit the American Institute of Certified Public Accountants (AICPA) website at http://www.aicpa.org/Pages/Default.aspx.