With the March 31 financial year end getting ever nearer, pressure on struggling companies to “massage” the figures is growing.
But “robbing Peter to pay Paul” is not the answer, Andrew Donaldson, forensic director at the Birmingham office of BTG Global Risk Partners, part of corporate recovery group Begbies Traynor, has warned.
Mr Donaldson said: “At the end of the day companies are judged on their results – the most obvious example being City expectations of quoted businesses. But many others take the same attitude.
“In-house accounts managers and financial directors can be under pressure to produce – the owners may expect a certain level of sales and profits. Perhaps there is a bank covenant whereby it has been agreed profits must cover interest three or four times over.
“But in the present economic climate the firm is not performing.”
He pointed out that the latest Begbies Traynor Red Flag Alert showed a 24 per cent year on year increase of companies facing “critical” levels of financial distress in Q4 2011, compared to Q4 2010.
The Midlands region had 829 critical problems in the fourth quarter of 2011 against 547 in the same period in 2010 – up 52 per cent.
Mr Donaldson went on: “If the manager’s job and bonus is riding on a certain figure he or she may be tempted to make the numbers fit.
“There are various ways – early recognition of turnover on a contract, a failure to account for all the costs incurred, over-stating the value of an asset, turning a blind eye to obsolescence. All are used to paper over the cracks. For example, it has been prevalent in areas such as IT software for the whole profit of a contract running over a number of years to be taken into one year.”
He added: “You are getting a short term fix now while leaving the problem for a future date. Robbing Peter to pay Paul will eventually find you out.”
