28Dec

9 Legal Ways to Inflate Profits

A company may want to increase its profits to increase its share value in the market, to improve credit worthiness of the company, to get more public exposure, to prevent itself from takeovers and to have a bargain position while making acquisition deals.

  1. Inflate sales – Double the units of sale or triple it as per need. Then at the end of the financial year, just reverse it showing it as sales return. Now, how the profit is inflated? In quarterly results of the company, the profit is inflated thereby increasing credit worthiness which can be used to dominate acquisition deals or further public issues.
  2. Charge less depreciation – Depreciation is a non-cash flow. So it can be modified to any value by making a policy change in the books. A reduction in depreciation means more profit.
  3. Convert long term to short term assets – During revaluation of short term assets, a part of fixed assets can be transferred to current assets (i.e. short term assets) and can be revalued and shown as an income in the P/L account to inflate profit further.
  4. Restructuring – The Company is not performing well and is on the verge of bankruptcy. In this scenario, debtors are generally restructured reducing their share by some percentage. Say they agree to surrender 50% of their debts. Instead of showing it as a deduction from debtors, show it as an income thereby more profit.
  5. Charging deferrable expenses from Reserves – Instead of charging expenses like preliminary expenses, advertising expenses (benefits of which will be received over a long period of time) from P/L account, deduct it from Reserves. Thereby expenses are understated in P/L account. Result is higher profit.
  6. Showing reversals as Income – Create huge provisions of bad debts, legal cases and other contingent events when the profit is good. Now in next year, you want to inflate profit for some reason. Then simply write back these provisions stating the reason of revision and taking the same as an income in P/L account.
  7. Revaluation of short term assets – In India, any revaluation in short term asset should be taken into account immediately in P/L account. Just call a professional valuer and ask him to revalue your short term assets. Show it as income and make the P/L account look rosier.
  8. Inflate selling price of closing stock – Inflate price of closing stock showing it as a policy change in prices in the coming year thereby more profit.
  9. Decrease value of opening stock – Reduce the value of opening stock by showing it as outdated or not suitable for sale at the original price. Thereby reduction of opening stock will inflate profit.

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