A Japanese electronics company has admitted to overstating its profit for six years in a row. It is intriguing to know how this was done. If you make a profit, then ultimately there is more money in the kitty, and the laws of arithmetic are just the same for large businesses as for small businesses. If you overstate profit for six years, then we would expect to find a lot more money in the kitty. This phantom kitty on the balance sheet is surely going to be asked about as it grows ever larger. Large British businesses have auditors, who are professional accountants, who would check that this kitty really exists. Sooner or later, it will be noticed in Japan as well.

Business managers are under pressure, both from their shareholders and from their lenders. If the business has underperformed, the accountant can manipulate various “soft” accounts such as prepayments, accruals and deferred income to make it look as if the business has done better. However that merely offloads the reporting problem onto next year as all these soft accounts go into reverse. This may be OK if the manager is expecting to be working somewhere else by then, but usually that doesn’t happen. The only remedy might be an ever-increasing soft account, but it will make the balance sheet look silly and the auditor is going to enquire. The management will always be caught in the end.

David Porthouse & Co are Carlisle accountants serving clients in Cumbria and North West England. They have a substantial interest in new technology and are developing an optical number recognition/datepoint system for scanning bank statements, with the intention of ameliorating the costs of accounts preparation. They also have a spreadsheet system which can be e-mailed back and forth between the accountant and clients. In addition, they have now developed an online quotation system for transparent pricing.