162 ShowMetheMoney
sures emerge from settlement agreements, consent decrees, and the
other legal obligations a company faces. Planning for additional fi-
nancing can produce pretty pictures despite dismal performance.
More generally, in an investment climate obsesse dwith short-term
results, as Levitt cautioned, there is invariably pressure to sustain
steady increases in earnings growth.
CHARADES
There are lots of aggressive accounting techniques an dopportunities
for difficult judgment calls, and so it would be surprising for any
two scandals to be identical.^5 However, most accounting scandals
have a simple common denominator: Earnings are inflated. One of
the most common ways to inflate earnings is to treat as an expense
something that shoul dbe treate das an asset or a liability. This de-
ception hides the costs of doing business on the balance sheet so
that they never burden the income statement.
Dissecting most accounting scams requires only a rudimentary
understanding of simple bookkeeping rules and their relationship to
financial statements. Double-entry bookkeeping requires a debit and
a credit in equal amounts for every transaction. The double entries
keep a balance sheet equalize d(assets always equal liabilities plus
net worth) an dreflect the direct relationship between income (rev-
enue minus expenses) an dnet worth.
More particularly, increases in asset or expense accounts require
debits, and decreases in them require credits; increases in liability
or revenue accounts require credits, and decreases in them require
debits. These bookkeeping rules are invariant, and so short of mak-
ing up or not recording transactions, the trickery involves classifying
transactions as assets or expenses or as liabilities or revenues.
Pearson/Penguin
Consider how the Pearson conglomerate accounted for book sales
through its Penguin publishing division. Sales made on credit re-
quire two entries in equal amounts: a debit to Accounts Receivable,
the asset account, an da cre dit to Sales, the revenue account. Sub-
sequent receipt of the cash payment requires a debit to Cash and a
credit to Accounts Receivable.
Penguin began granting 10% discounts off its list price to selected