Cooking the books refers to the act of falsifying of a corporation’s financial records. One example of this is the manipulation of data in order to show higher earnings. To do this, a company can delay the recording of expenses in its financial statements. It can also input revenues prematurely, in order to make the company’s revenue appear greater than it really is.
The incorrect information inputted affects the earnings of share per stock. This translates into increased investor confidence. Also, it provides for the payment of executive bonuses.
High-ranking executives are often entitled to executive bonuses whenever company revenue goals are met or surpassed. In many cases, this is the main reason for cooking the books. Another reason for engaging in such activities is the need to keep a struggling company afloat while working towards generating actual profit.
Several companies have been found guilty of cooking the books. One of the most notorious cases is Enron, which was exposed in the early 2000s. The realization that such activities do take place has made many investors more vigilant. This pressures companies to ensure transparency of their transactions and records. New policies also protect investors. An example of this is the Sarbanes-Oxley Act of 2002.
Cooking the books may also be referred to as creative accounting. Under creative accounting, standard accounting practices are used. However, the intention is still mainly to influence investors to make decisions which are favorable to the corporation.