How Cooking the Books Works

Do you know what "cooking books" mean? Peepo / Getty Images

The year 2002 saw the end of an era of skyrocketing stock prices and booming businesses. Things that had seemed to be too good to be true were just that. Companies that we previously thought of as unstoppable didn't have the earnings they told us they did.

Instead, they had been "cooking the books" to create the appearance of earnings that really didn't exist. A company is guilty of cooking the books when it knowingly includes incorrect information on its financial statements -- manipulating expenses and earnings to improve their earnings per share of stock (EPS).


In this article, we'll look at the tricks that some companies used to beef up their financial documents as well as why they do it. We'll also examine some of the fallen giants like Enron and WorldCom to see what happened and where they are now.