While making investment choices, investors rely on reports or financial statements published by a company. However, not all companies are always truthful while publishing their financial data. Cookie jar accounting is a practice where companies tend to mislead their investors in believing that they are achieving their targets when in reality they have been falling behind. The companies attempt to manage their earnings by using their cash reserves. These reserves are set up during profitable periods so that the company may drawdown during low-profit periods. This way the investors would think that the company has a premium valuation and stock prices would rise.
Analysts also believe that the cookie jar accounting system is a system of fraudulent activity as the reported earnings are not the actual results of the company.
A grand example for cookie jar accounting would be the Satyam scam. The company had been manipulating its accounts and had been indulging in fraudulent practices. The company had overstated its debt position, created ghost employees and fake receipts which in turn showed more revenue. Even the independent auditors, PriceWaterhouseCooper, never highlighted the fraud. Therefore, the price of the stock kept increasing. Finally when the gap between actual figures and the fraudulent figures seemed drastic, the promoter made an attempt to save the company by acquiring a genuine company owned by the promoter for 300 million dollars, which obviously did not seem fair to the shareholders and the share price fell from Rs. 179 to Rs. 23 in a single trading session. Immediately after, the scam broke out in 2009, when the promoter confessed to the scam to the tune of Rs. 7800 crores.
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