Do numbers lie?

Corporate management has significant latitude in choosing what numbers to report and when. But business pressures can cloud their judgment. This article examines how using accounting gimmicks and manipulating financial statements might satisfy investors but can cross into fraudulent territory.

John Smith, CEO of ABC Doughnuts, had a problem: Revenue was down for the first time in company history. And he attributed this to two main reasons.

First, he'd launched an aggressive growth strategy to expand ABC Doughnuts from its traditional storefronts into grocery aisles and gas stations nationwide. Unfortunately, these moves came at a horrible time. The country had just entered a low-calorie diet fad, and doughnut sales were declining.

Smith also had a personal stake in hitting his earnings numbers — the board of directors had offered him a lucrative bonus tied to the price of the firm's stock value. An off quarter would no doubt reduce the stock price and consequently his bonus. Smith was counting on this bonus to pay for his daughter's wedding and, perhaps, a nice Caribbean vacation for the family.

There were only a few more weeks left in the quarter and Smith needed to motivate his troops, so he called a meeting of the C-suite and the department heads. He listened to the head of marketing drone on about promotion ideas and the head of sales talk about re-doubling their efforts and selling the "sizzle and not the steak."