when a manager would consider “taking a big bath”

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One of the hardest accounting frauds to spot is big bath accounting. When a company is doing really bad and has no chance of meeting earning expectations, unscrupulous management would begin writing-off every expense and asset they could imagine. As a result, future expenses are reduced significantly and naturally earnings increase. In other words, the company is taking a big bath in the worst year so it can wipe its slate clean. This almost always guarantees record-breaking earnings in subsequent years, likewise performance bonuses.

The reasoning behind taking a big bath is quite simple: We already look bad, so let’s make ourselves look as bad as we can. Needless to say, management wouldn’t take the blame for the fall. They would either blame it on previous management or the challenging economic conditions. The sweet-talking CEO never fails to wrap up with a personal assurance that the company is well poised to seize the opportunities when the market returns to more favorable conditions.

jeff jeffy answered 1 year ago

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