The trick of “cooking” financial statements

The story of businesses “adding fish sauce, adding salt” to increase profits or finding ways to dilute to reduce profits and arrange profits in another quarter is not new.

The end of March is also the soi season financial report Quarter 1 or for many businesses is to look at the previous year’s financial statements. So what “processing tricks” will investors need to pay attention to each earnings season?

Take a big bath

The company removes items “hanging” on the balance sheet to “clean up” the financial statements.

(Illustration image – Photo: Investment Newspaper)

Cookie Jar Reserve

The company will create “Cookie Jar” (cake jar) for the purpose of “saving” profit. “Cookie Jar” is made up of provisions, pre-recognition of expenses and deferred revenue recognition

Cherry picking

Cherry picking – a common trick, when companies “selectively” skillfully sell, invest in securities to increase sales profits.

Vietnam still does not have specific regulations requiring enterprises to disclose information according to international accounting standards and that is still a gap for many businesses to build financial statements according to their own standards according to the will of the public. business owners.

Knowing how to read a financial statement is a basic requirement for investors, but how to read a financial report so as not to get lost in the matrix of numbers that have been “cooked and processed”?

The above are some common financial statement cooking tips, but there are still quite a few recipes that businesses often use.

Big bet on the future

For example, Big bet on the future: The company “bets on the future” by applying loopholes in the provisions of accounting standards to record all future profits in the current year. .

Throw out the problem child

Or Throw out the problem child: The company removes the worst parts of the financial statements through financial transactions with 3rd parties. This is the most common trick on the Vietnamese stock market.

Use of SPEs

Or the company will use “special purpose units – SPEs” to generate virtual revenue, hide debt. The most common use case of this trick was in 2016 when it created VND 980 billion of virtual inventory.

The common point is that the final “frying and cooking” is aimed at the two words “profit”. Therefore, when looking at financial statements, investors should not only see if profits increase or decrease, but should look at the quality of profits.

The fourth quarter of 2021 and the whole year of 2021 witnessed many businesses announcing large profits over the same period, but in fact, the profit did not come from their main business activities, but a lot came from other items such as stock investment or valuation. property revalue.

Check the “quality” of the business’s profit

Other profit items that are assessed as unsustainable, such as “erratic” stock investment profits according to market fluctuations; Or riskier is the profit from revaluation of assets, as DIG quarter 4/2021 reported a profit increase of 33% over the same period, but other profit was recorded to VND 785.73 billion due to inventory valuation. 861.97 billion VND. The revaluation of assets does not generate cash flow, therefore, despite the increase in profit, the company’s main operating cash flow is still negative and even larger than 2020.

“When looking at profits, investors need to look at the quality of profits, not just look at the numbers because the quality of profits is considered a sustainable profit,” said Mr. Pham Luu Hung, Deputy Director. Director of SSI Research, said.

“Investors really want to make a profit, invest in the inventory turnover index business to see if the inventory will decrease. If the business is profitable, the inventory turnover will be faster and inventory will decrease, this is a factor to see indirectly whether the business is going in a positive or negative direction”, said Mr. Do Thai Hung, Director of FINPROS Investment Joint Stock Company.

To see if a business is healthy or weak, in addition to the financial statements, investors should also pay attention to the balance sheet. A typical case is HAG in the period 2015 – 2017, short-term debt even exceeded short-term assets, this is a dangerous indicator of corporate health, showing the risk of bankruptcy and immediately stock price at that time. reduced by 5 times.

In fact, the adjustment of financial statements or not will depend greatly on the will of business leaders, so one of the important factors for investors to decide to buy shares of an enterprise is whether the business leaders have the right “nice” does not or has a history of many problems related to information transparency.

Regarding the industry group, the bank is able to adjust profit quite easily thanks to the provisioning. If in manufacturing enterprises, the conditions for making provision are quantitative, in the banking group, the conditions are also allowed to be qualitative to assess “is the loan at risk of becoming bad debt to extracted”.

However, given the nature of a key industry to the financial market, this ability allows banks to hedge risks well, especially during the period when businesses faced many difficulties during the last 2 years of COVID-19 pandemic. via.

Recognizing the problems investors are facing, the Ministry of Finance has a roadmap to apply international accounting standards (IFRS). From 2022 – 2025, businesses with needs and sufficient resources can voluntarily apply IFRS to prepare consolidated financial statements. From 2025, it will be a mandatory application period for many companies. However, until then, investors will need to be proactive in learning how to self-study and study business financial statements to limit risks and increase opportunities in the investment journey.

* Invite readers to watch programs broadcast by Vietnam Television on TV Online and VTVGo!