When a business does not adhere to generally accepted accounting standards (GAAP), it engages in unethical accounting practises. The federal government establishes GAAP regulations. Examples of non-compliance with GAAP include recognising revenue before a customer accepts shipping, failing to recognise revenue-related expenses, and failing to write down defective inventory.
A company’s revenues might be inflated by recognising revenue for inventory that is still in its control. A customer must take physical possession of the inventory in accordance with GAAP. A corporation may still bill the customer, but it cannot record the transaction as a sale on its income statement. Similarly, GAAP includes restrictions regarding spending. A corporation is “cooking the books” if it capitalises expenses and lists them on the balance sheet rather than as expenses. Between 1999 and 2002, the telecommunications firm MCI improperly recorded its revenue and expenses. Arthur Andersen, a defunct public auditor, signed off on MCI’s financial accounts while committing fraud.
In addition, a corporation might reduce its expenses by avoiding writing off defective inventory. Inventory that is no longer saleable or in operating condition is considered bad. In order to increase net income and thus financial success, an unethical corporation could avoid writing down the expense.
