Magazine article Strategic Finance

Cooking the Books - A Slippery Slope

Magazine article Strategic Finance

Cooking the Books - A Slippery Slope

Article excerpt

I'm continually surprised when I hear about yet another case of companies getting caught with accounting irregularities arising from a conscious effort to mislead. I'm not talking about honest mistakes here, or good-faith differences of opinion as to alternative accounting treatments. I'm talking about out-and-out fudging of the numbers. It astounds me that anyone could weigh their personal risk/return trade-off and conclude that it made sense to try to get away with such activities. I won't even bring into the discussion the question of people's ethics. Let's just consider the cold question of risk/return.

On the "return" side of the equation lie things like stock price (in which a given individual will have only a relatively small personal stake); perhaps the individual's performance bonus or next promotion; or, at the extreme (I'll bet only very rarely), their job. But consider the "risk" side of the trade-off. Certainly loss of job. How about loss of the company as stock price crashes and restructurings and takeovers result? How about loss of career? How about loss of house (big fines, lawsuits)? How about loss of freedom (jail time)? The risk/return trade-off just doesn't make sense. I therefore have to conclude that no rational person would intentionally get involved in accounting fraud. Then why does it pop up in the news so frequently? I think I know . . .

It must be that the vast majority of fraudsters don't start down the path with the expectation that they're going to stay on it. …

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