Bookkeeping has long been a profession associated with a certain moral flexibility in the popular imagination. The phrase “Cooking the Books” which implies financial corruption directly references the “books” on which bookkeeping is based. Specifically it means to lie, distort or otherwise fraudulently misrepresent the financial data of an organization in order to present a false picture of the company’s health.
Most often this will be done to artificially bolster the share price of a company. Many executives and business leaders can expect to be substantially rewarded if the organisation thrives under their leadership with bonuses and increased pay. Likewise lower down the company there is often a culture of reward for employees and managers deemed to be succeeding. As a result there is a constant temptation for individuals and even entire companies to misrepresent themselves financially.
Behind the Curtain: When the Truth Gets Exposed
Nevertheless, whatever colourful metaphor is used to describe it, this practice is simple outright fraud and can be hugely dangerous for all parties when it inevitably is discovered. Shareholders, being directly invested in these companies and businesses have the most to lose. When an organization previously perceived as stable and solvent is suddenly exposed as not having any money this often results in a huge crash in investor confidence and a plummeting of the value of shares held.
But it’s not simply the owners that are effected with a loss in the value of some ephemeral share price. The sudden disruption can make other companies and consumers reluctant to do business with a group that has A) demonstrated itself to be effectively untruthful and B) suddenly has much less money to operate with than it is supposed to. The knock on effect then can ultimately lead to rapid restructuring or even the entire closure of the company as a result with the associated losses of jobs, careers and incomes for people employed with or otherwise reliant upon it.
One of the largest examples in recent times of large scale fraudulent accounting that resulted in the crash of a major industry player was the company Enron, a major American utilities company that had built itself into a huge success story during the 1990’s. However, in 2001, evidence of large scale systematic corruption and financial fraud came to light with huge amounts of the companies’ debts and assets creatively misrepresented so as to make Enron seem so much more successful than it really was. When exposed, the company went bankrupt with the loss of all 20,000 jobs employed by the company at its peak.
The Bookkeepers Role
Bookkeepers have an ethical responsibility in their roles to be truthful about the accounting data they enter into the books. A company working on false information about the state of it’s finances is a company in a perilous and risky situation. Therefore it is essential that proper practice is followed to ensure that companies remain healthy and pragmatic about their accounts and to ensure the security of everyone associated with the company.
For the same reason, it is prudent for managers, executives and investors to have an understanding of bookkeeping practice. Even if they have nothing to do with recording the books themselves, being illiterate in understanding the company’s financial situation is akin to operating blindly. The responsible leader must understand what the data is saying if they are to have any chance of properly leading their company forward.