Summary
Accounts payable practices have served as the most commonly used legal means of steering into (i) the cash and cash equivalent balance to be reported in a pending balance sheet and/or (ii) the cash flow provided by (used in) operating activities to be reported in a pending statement of cash flows. Analysts must be attentive to this long-standing practice of “window dressing” and adjust for it accordingly in their respective models.
Analysis
As a former “Big 8” auditor, NASDAQ-company accountant and Assistant Chief Accountant in the SEC’s Division of Corporation Finance, I have directly and indirectly witnessed the long-standing practice by public companies, over and beyond the referenced technology sector, of targeting period end cash and cash equivalent balances and periodic operating cash flows by intentionally deviating from their otherwise customary payment intervals for paying vendor invoices. For example, a company that customarily pays its vendors invoices in thirty days will instruct its accounts payable supervisor to forego the payment of any vendor invoices during the two weeks preceding a fiscal quarter or year end, thus inflating its period end cash and cash equivalent balance and period operating cash flows. Conversely, a company may intentionally accelerate the payment of vendor invoices prior to period end in order to maintain comparability with a prior period, in effect covering its prior period manipulations. Accordingly, analysts should adjust their models to negate the non-operational distortions resulting from these deceptive accounts payable practices.
