The Cookie Jar: Implications of Dishonest Accounting Practices Case Summary

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Case Summary

This case study is about the difficult ethical decision that Nick O’Brian has to make as a junior internal auditor at his Aunt Amelia’s startup software company. The company started in Aunt Amelia’s bedroom and within a few years, with the family’s support, became a publicly-traded million dollar company. Immediately after college, Nick was recruited by his aunt to help out with the company and he began his work as the company faced the release of exciting new software, Brain Wave. Nick was unofficially apart of the company from day one, so he was reasonably invested in its continued success. One day, as Nick is reviewing the books, he notices some irregularities. The company seems to be under-reporting its financial gains and using some shifty financial reporting practices to aid in weathering the less favorable financial storms. While these dishonest “cookie jar” reporting practices are the opposite of the type of reporting that got Enron (and other companies like it) in trouble, Nick is concerned that the company could get in serious trouble – he decides to take his concerns to the CFO, Lee Marchetti and the CEO, Aunt Amelia (Carpenter, n.d.; Adkins, n.d.).

Central Concerns & Questions

Nick is right to suspect that Lee has been dishonest in his corporate accounting and financial record-keeping practices, especially since the errors are so obvious and Lee has been managing accounting departments for many years. Lee brushes Nick’s concerns off by arguing that the accounting is a little conservative, at best, and argues that accounting is creative, the real problem comes in when companies inflate numbers and not when they are conservative. Lee has been an accountant long enough to know that no form of dishonesty or deceitful practices can be deemed ethical (Bloomberg News, 2013; Weiss, 1997).

Discussion of Accounting Standards & Practices

At issue in this case study is the importance of reliable accounting standards and practices. In fact, in an article found on the Houston Chronicle’s Small Business sub-site, W.D. Adkins insightfully notes that “investors rely on the accuracy and honesty of financial statements prepared by corporations to help them make investment choices (n.p.). In essence, whether finances are being under-reported or over-reported is scarcely relevant. Nick is concerned because cookie jar accounting is a misleading practice that executives employ to make it appear that a company’s stock is solidly on the incline and always achieving performance targets when, in actuality, it may be falling short at times (Adkins, n.d).


How Cookie Jar Reserves Work. A Cookie Jar is a “rainy day” cash reserve that is not disclosed on company financial statements or is intentionally set aside to offset poor earnings in lean years. A cookie jar makes it appear that the company is consistently achieving earnings benchmarks and steadily on the incline so that it is always meeting investor expectations. Nick is concerned that this is unrealistic, if not impossible, for a startup company to achieve. He refers to the books as smelly. It is interesting that it does not take an in-depth look for him to discover the problem, yet Lee claims no knowledge of anything unusual going on (Adkins, n.d.; The Economist, 2010; McKenna, 2011).

Dell Computers v. Securities Exchange Commission. In 2010, Dell Computers came under investigation by the SEC due to alleged cookie jar accounting practices to the tune of $100 million. The SEC charged Dell with having entered into a significant financial agreement with Intel and failing to disclose payments Intel made to the company to its investors. While Dell had failed to meet its earnings targets every quarter between 2002 and 2005, its financial statements reflected that the company was in good health and shadowed the undisclosed exclusivity payments the company received to make up its shortfall. Cookie jar accounting is egregious. As a young up and coming accounting executive, Nick is right to insist that the company avoid expensive risks and mistakes and take the time to examine company financial statements and make necessary corrections (Carpenter, n.d.; Adkins, n.d.; The Economist, 2010).

Concluding Remarks

In the 2008 and 2009 financial crash, a lot of investors “lost their shirts” because of the unethical and fraudulent practices of Enron and many Wall Street firms like it who were barely regulated and saw fit to report their earnings in ways that would benefit the company but completely mislead the public. A publically traded company has a legal, moral, ethical and financial responsibility to reward investors with good information as a way to thank them for instilling their trust and financial support in the firm. Investors know and understand that markets can be volatile. Companies have no right to rob investors of the right to choose whether or not they will continue to enlist their hard-earned money in the support of a financially struggling company. An informed decision-maker would frown upon any cookie jar accounting practices because it gives false hope to investors and intentionally misleads them to make financial decisions that could be destructive over the long term. Much more is at stake than the loss of investors, accounting departments do well to remember this in their reporting schemes.


Adkins, W.D. (n.d.). An Example of cookie jar accounting | Small Business - Retrieved October 20, 2013, from

Bloomberg News. (2013, July 15). Citigroup 42% profit rise beats estimates | Crain's New York Business. Crain's New York Business. Retrieved October 20, 2013, from

Carpenter, Lori. (n.d.). Conservative recognition or cookie jar reserves? Case Study.

The Economist. (23 July 2010). Taking away Dell’s cookie jar. Accessed on 20 October 2013 from:

McKenna, F. (2011, November 22). Citigroup reaches into accounting cookie jar. American Banker. Retrieved October 20, 2013, from

Weiss, G. (15 December 1997). Investors beware. Business Week. Retrieved 20 October 2013.