Reliable expense figures are critical for many reasons including outsourcing stud-
ies, make versus buy decisions, results evaluation, and numerous performance mea-
sures within the firm. Since a firm may be reporting numbers in detail by cost cen-
ters, branch offices, and various lines of business, it is important for local
management to have numbers that are useful and reliable on a day-to-day basis, not
distorted numbers based on simple averages of what transpired during the period. In
Exhibit 27.3, we illustrated an example where expenses were overstated by 23%; in
another, expenses were understated by 30%. During any reporting period, it may very
well turn out that some expense overstatements are offset by expense understate-
ments so that on balance average expenses are a satisfactory depiction of what actu-
ally transpired in the aggregate. We reiterate once again, however, that management
decisions are often not made on overall results. They are based on detailed costs that
together contribute to the overall picture.
Another compelling reason why the proposed reporting framework merits man-
agement attention is the avoidance of results manipulation. Assume in our previous
example that a salesperson or purchaser arranges with a supplier to have promotional
supplies (to be charged to the salesperson’s/purchaser’s account) delivered on the
first day of Month 2 with payment being made on the 10th, rather than having deliv-
ery take place on the last day of Month 1 with the same payment date. By delaying
the transaction by a day, the salesperson can significantly skew reported results in his
favor. In this instance the traditional reporting model would record an expense of
$5,917 versus $7,692 or 30% less. This understatement would, as before, be offset by
an equivalent nonoperating translation loss.
Last day delivery TL1,000,000/TL130 $7,692
Delivery a day later TL1,000,000/TL169 $5,917Under the suggested reporting framework, it would not matter when delivery is
taken as the transaction would always be recorded when payment is made. Hence, the
transaction would be reported at $7,062 (TL1,000,000/TL141.6) regardless of
whether delivery occurs in month one or two. This encourages an astute salesperson
to improve his reported results by arranging for immediate delivery while postpon-
ing payment as long as possible. The longer payment is postponed, the lower the cost.
27.4 OPERATING EXPENSES INCLUDING COST OF SALES 27 • 9TL$1,000,000 Expenses in Month 1
Varying Invoice Dates and Payment Dates
Invoice Payment Today’s Proposed
Day Terms Measure Measure Diff. %A 1 Cash 7,692 10,000 2,308 30.0%
B 5 5 days 7,692 9,124 1,432 18.6%
C 5 15 days 7,692 8,361 669 8.7%
D 5 25 days 7,692 7,692 0.000 0.0%
E 10 30 days 7,692 7,062 –630 –8.2%
F 20 30 days 7,692 6,472 –1,220 –15.9%
G 30 30 days 7,692 5,917 –1,775 –23.1%
Exhibit 27.3. Over or Understatement of Expenses.