Can Accountants Be Trusted?
Contrary to what most people might think, there are a lot of loopholes in corporate accounting. This is because there are so many sources of funding that corporate accountants must cover. All of this data and all of the statistics that must be calculated from it are extremely complex, therefore, many big businesses take advantage of the fact that others won’t know when to question the calculations. Even though there are stringent business accounting guidelines that big corporations have to follow, there is still room for them to manipulate the reports. It is quite easy for a skilled corporate accountant to manipulate an accounting book in order to benefit the business that employs them.
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1) Manipulate Cash Flow
Big businesses make thousands of financial transactions yearly, and they must have a way to keep track of them all. This is where ledgers come in. Ledgers are documents that are used to organize the many transactions that businesses make. They can come in the form of spreadsheets or they may have many other varied layouts. A single ledger will organize a specific category of transactions that the company has made. Many ledgers combined form the accounting book that documents everything that has occurred during a certain span of time.
The way that big corporations manipulate cash flow is as follows. When the accountant documents transactions, he specifies how much money was spent and what it was dedicated to. Even though the ledgers may show that a certain amount of money was used for a particular expense, that isn’t necessarily where the money went. The corporation’s money isn’t actually pulled from the bank account until a check has been submitted and cleared. Until then, corporate accountants can really list anything they want in the ledgers while actually spending on something completely different. The accounting books may be shown as evidence of spending, but in reality, those funds are still available to be used on whatever the company deems more necessary.
2) Move to Avoid Taxes
While actual tax evasion can have severe penalties for any business, there are ways that businesses can avoid having to pay significant taxes. It isn’t possible for a company to avoid federal taxes since rates are the same all over the US. However, state taxes may vary greatly from one state to the next, so it is a major advantage for a big corporation to be located within a state that has limited taxation. Many states will lower taxes to encourage businesses to move to there, boosting the local economy. Many corporate accountants will suggest relocation to their superiors since heavy taxes account for a huge proportion of overall expenses.
3) Inflate the Earnings
Big businesses are usually owned by more than one entity. There may be multiple shareholders within a large corporation. Since shareholders own some proportion of the business, they always want to see it do well. This means having evidence of large profit margins that should ideally increase over time. Shareholders will not invest in a company that shows signs of declining sales and loss of profit.
To give the shareholders what they want to see, corporate accountants will inflate the company’s earnings so that everything looks good in their eyes. The ledgers may reflect certain sales that never actually occurred to deceive the shareholders. Another way to appear more satisfactory is to not list certain expenses so that it seems that the company isn’t spending so much money. Either way, the corporation will appear to be profiting steadily.
4) Take Advantage of Currency Exchange
Corporations that have both domestic and international branches often take advantage of the differences in the value of the two countries’ currencies. Money can “disappear” here and there when translating one currency to another.
Since accounting regulations vary from country to country, it may be easier to manipulate the accounting books in certain international branches. Many businesses keep separate books that have been calculated according to both countries’ regulations. That way, it would be more difficult to see where all the money really went and would take both accounting books to see exactly how all the funds were allocated.
Marcus Wilson is a corporate accountant and guest author at accounting-degree.org, a site with resources and information to help prospective students find online programs for accounting degrees.