Common Strategies Companies Use to Falsify their Financial Statements

One of the most common forms of fraud committed by businesses is “cooking the books,” or falsifying important financial documents and statements to make out that their numbers are actually better than reality would reflect. This is particularly common during periods of economic turmoil, such as what we’ve seen over the last year as a result of the COVID-19 pandemic.

Here’s a quick look at some of the most common methods companies try to use to get away with this fraudulent activity.

  • Fake revenue: Companies may try to inflate their earnings by entering fake contracts or sales that never occurred. This happens even at large, successful companies, and can be difficult to uncover without the assistance of whistleblowers unless the disparities in the numbers are glaringly obvious.
  • Channel stuffing: This is a method used by companies in which they inflate their sales by sending large amounts of product to distributors even if the demand isn’t there. They’ll typically do this near the end of reporting periods when they need to find ways to increase revenues. Overselling inventory in excess of public demand is a form of fraud.
  • Improper revenue recognition timing: This is perhaps the most common example of a book-cooking scheme in America. Revenue can only be recognized after it’s been both earned and realized. Improper timing of revenue recognition will happen if a company shifts revenue from one period to another. The most common form of this is companies accelerating the recognition of revenue so they can meet their earnings goals.
  • Misleading projections: Companies may purposefully issue misleading projections to avoid disclosing known risks of them missing key financial metrics that investors would typically rely on for financial evaluations and decisions.

If you are aware of any financial wrongdoing on the part of your company, talk to an experienced whistleblower attorney at Kardell Law Group about how to come forward with the information you have while protecting your rights and career.