TL;DR: This post isn't a guide on "cooking the books" – leave that to forensic accountants. Instead, it's about equipping you to spot potential red flags in financial reporting. Managers might manipulate financials ("做數") for personal gain (bonuses, options value) or corporate advantage (M&A, loans). Key warning signs include: falling commission rates despite rising sales, hidden expenses disguised as assets, ballooning Days Sales Outstanding (DSO), holding high cash and high debt simultaneously, diverging profit and cash flow trends, sales growth without proportional cost increases, and suspiciously smooth year-over-year profits. Understanding these helps you critically evaluate financial health.
Today, I want to touch on a sensitive but crucial topic in business: financial reporting integrity. This series aims to shed light on common ways financial figures can be manipulated – what's often called "cooking the books" or "做數" in Cantonese.
Let me be crystal clear: the purpose here is absolutely not to teach anyone how to commit fraud. That’s illegal and unethical, plain and simple. Instead, my goal is to enhance your ability to recognize potential "red flags" – those subtle clues that might suggest something isn't quite right beneath the surface of the numbers. Think of it as financial literacy for fraud detection.
Why "Cook the Books"? The Underlying Motivations
Why would managers or business owners resort to manipulating financial statements? Usually, it boils down to money and pressure.
- Personal Gain: Inflated profits can justify larger year-end bonuses or make stock options significantly more valuable.
- Corporate Maneuvering: "Beautified" numbers can boost valuations, making a company look more attractive for Mergers & Acquisitions (M&A) or securing more favorable terms for bank loans.
- Meeting Expectations: Intense pressure from investors or the board to meet specific financial targets can sometimes lead individuals down a dangerous path.
The basic profit formula is simple: Profit = Income - Expenses. To make the numbers look better ("靚" / pretty), manipulation typically involves artificially inflating income or hiding/delaying expenses.
Seven Red Flags to Watch For
While sophisticated fraud requires expert investigation, here are seven common indicators that might suggest financial figures are being massaged:
- Falling Commission Ratios: If reported sales revenue is skyrocketing, but the commission expense paid to the sales team isn't rising proportionally (or is even falling), it begs the question: are those sales real? Genuine sales usually incur genuine commissions.
- Rising Payables / Hidden Expenses: If reported income is climbing steadily, but corresponding expenses seem strangely low, profits will naturally inflate. One trick is to delay recording accounts payable or improperly capitalize expenses (i.e., hide them on the balance sheet as assets instead of recording them on the income statement).
- Continuously Rising DSO (Days Sales Outstanding): DSO measures how long it takes to collect payment after a sale. If a company reports significant sales growth based on fake invoices (generating accounts receivable), but no actual cash is collected, the average number of days sales remain outstanding will keep climbing.
- Simultaneously High Cash and Bank Loans: Cash is king, but carrying significant bank debt usually comes with hefty interest payments. If a company holds large cash reserves while also maintaining high-interest loans, why wouldn't they pay down the debt? One possibility is needing the cash liquidity to manage the flow of funds required by fraudulent schemes (e.g., round-tripping cash).
- Growing Profit, Shrinking Cash Flow: In a healthy business, accounting profit and operating cash flow generally move in the same direction, even if not perfectly synchronized. If reported profits are soaring while the actual cash generated from operations is stagnant or declining, it's a major warning sign that the profits might not be backed by real cash.
- Lack of Proportionality (同比性): Business activities are interconnected. When sales increase significantly, you'd normally expect related costs (like Cost of Goods Sold, shipping, raw materials, certain operating expenses) to increase somewhat proportionally. If revenue jumps but core expenses remain flat, is the company suddenly selling air? Or did employee productivity magically triple without anyone getting a raise? It warrants skepticism.
- Unnaturally Smooth Profits: Real business performance ebbs and flows due to market conditions, seasonality, and myriad other factors. If a company reports remarkably consistent, smooth profit growth year after year, with numbers landing suspiciously close to targets every single time, it might indicate that management is using hidden reserves or accounting tricks to smooth out the natural volatility.
The Crucial Difference: Fraud vs. "Creative Accounting"
It's vital to distinguish deliberate "cooking the books" (做數) – which is fraud intended to deceive – from "creative accounting." Creative accounting involves using the flexibility within accounting standards (like GAAP) to present a company's financial position in the best possible legal and ethical light. One is strategic presentation; the other is deliberate deception.
Stay tuned for the next part of this series, where we'll delve into some more advanced concepts. Understanding these signs isn't about becoming cynical; it's about being diligent and informed.
好孩子不要學系列：「如何識穿做數：入門篇」
本系列會說明一些常見的「做數」方法，但目的並非叫你學會「做數」，呢啲事留番俾受過訓練的專業人士就好。相反，這系列是為了讓你更有能力去發現舞弊的「蛛絲馬跡」。
「點解要做數/ COOK THE BOOKS？」
通常管理者/ 老闆做數的目的，大部份都是為咗「錢」。例如上市公司要合理化年終獎金、維持高股價令到Option更有價值，又或者可以令到估值/ 股價提升，方便進行M&A，又可能係方便向銀行借錢。
《收入》-《支出》= 利潤
上市公司為咗做「靚」盤數去俾人睇，一定係提升收入及利潤。（因為有利潤，P/E; bonus; 股價都可以合理化）以下有7招去拆穿「靚」數。
- 「佣金比例下降」 生意係假嘅話，咁唔使俾佣啦⋯⋯
- 「應付帳款上升」 如果收入上升但係冇相對支出，利潤就自然升啦。管理層如果唔想將應付帳款入數，就可以將支出收埋喺Current Asset 到。做到所謂（支出費用資產化）。
- 「DSO 持續上升」 因為有假收入單，淨係得應收帳，又如果冇真係俾錢，（Day of Sales Outstanding）嘅趨勢就會持續上升。
- 「現金同埋銀行貸款同步上升」 銀行貸款利息相對高，有現金點解唔還錢？因為做假收入要持續用現金周轉。
- 「會計利潤增加同時現金流下降」 正常嘅公司利潤增加嘅時候，現金流相對嘅同步唔會差太遠。除非利潤係假嘅…
- 「同比性」 銷售增加嘅時候，成本支出等同步都應該會有增加。如果銷售收入有增加但支出沒有同步增長，一係佢係賣空氣，一係員工生產力大進步。（但係唔需要加人工？）
- 「順滑利潤」 生意有上有落，如果公司每年利潤嘅銀碼都差不多嘅時候… 咁佢哋公司一定有一個睇唔到嘅Buffer…
做數和「創意性會計」喺完全唔同概念，在會計原則（GAAP) 允許的範圍內，以最佳方式呈現公司的財務狀況好睇，這是創意，是合法而且受到行業認可的；但做數的目的就是為了欺瞞，這是舞弊。
Trust, but verify. Keep asking questions and analyzing the numbers critically. Stay sharp
