Earning Manipulations

How Companies Cook their Books: A Simple Retail Guide for the Indian Investor.

Ever wondered how some companies magically show huge profits at the end of the year? It's not always as rosy as it seems.

Here's a peek into the sneaky tricks some use:

1. Fake Income at Year-End: Imagine making up imaginary profits with just a single journal entry. Sounds easy, right? That's exactly what some companies do!
   

2. Sales for Unsold Products: They recognize sales for products still sitting in the warehouse. Yes, they haven’t even shipped them!
   

3. Inflated Sales to Friends: Selling to related parties (like sister companies) but puffing up the numbers.
   

4. Revenue from the Future: They count next year’s revenue in the current year by keeping the books open longer than they should. It's like celebrating your birthday a month early.
   

5. Shipping to Shaky Resellers: Sending products to resellers they know can't sell them. Eventually, the products come back, but the revenue was already recorded.
   

6. Imaginary Future Sales: They even accrue sales that haven't happened yet. A bit like counting your chickens before they hatch.
   

7. Understating Bad Debts: Intentionally underreporting allowances for bad debts, making the books look healthier.
   

Why do they do it? To jack up the stock price, of course! Higher stock prices mean more money for the executives when they sell their shares. Then, in the next period, they quietly reverse those bogus entries.

The Real Culprits

This isn’t just a rogue employee issue. Often, it's the big shots at the top—owners, board members, or management—setting an unethical tone. They demand higher profits without getting into specifics, and when the fraud is caught, they claim ignorance. They’ll say their subordinates acted alone. Convenient, isn’t it?

So, next time you see a company reporting unusually high profits, take a closer look. Things might not be as squeaky clean as they appear.

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