What is Cookie Jar Accounting? | Is it ethical?

  • What is Cookie-Jar Accounting?
  1. • Cookie jar accounting, also known as cookie jar reserves, is an accounting practice in which a company takes a quantity of large reserves from a profitable year and uses them to offset losses from less profitable years.
  2. Cookie jar reserves are savings from previous quarters that a company records as earnings in subsequent quarters to make it appear that its earnings were higher than they really were.
  • Is it ethical?
  1. A company accountant can dip into the cookie jar to exaggerate the stats if the company fails to fulfil its earnings target.
  2. Through this process, companies can mislead investors into believing that their losses are less than the actual value.
  3. Needless to say, the practice of cookie jar accounting is frowned on by government regulators as it misleads investors on the company’s performance.
  • Indulge Of Corporates
  1. On July 22 2010, Dell was accused by the SEC (Securities and Exchange Commission) of falsifying financial earnings reports in order to give the impression that it was outperforming analyst earnings projections.
  2. In this case, the cookie jar reserves were said to be undisclosed payments from chip giant Intel in exchange for Dell agreeing to use Intel’s CPU chips exclusively in its computers.
  3. The SEC also alleged that Dell did not disclose to investors that it was drawing on these reserves.
  4. In fact, the Intel payments accounted for a significant portion of Dell’s profits, accounting for up to 72% of the company’s quarterly operating income at its height. After the agreement with Intel ended in 2007, Dell’s quarterly profits plummeted.
  5. Dell stated that the fall in profitability was due to an aggressive product pricing strategy and higher component prices, but the real reason was that it no longer received payments from Intel, according to the SEC.
  6. At the end, Dell paid a $100 million penalty to the Securities and Exchange Commission (SEC) in July 2010.
  • Key Takeaways
  1. Cookie jar reserves are sums of money kept hidden by a company in order to reveal them in a future quarter if its performance falls short of expectations.
  2. Cookie jar accounting deliberately misleads investors and violates accepted public company reporting practices.
  3. In order to hide unsatisfactory results, a company may create a liability in one quarter and then erase it in a subsequent quarter.
  4. The computer giant, Dell was caught using this practice and eventually had to pay $100 million penalty to Securities & Exchange Commission.

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