Plug (accounting)

A plug, also known as reconciling amount, is an unsupported adjustment to an accounting record or general ledger. [1] Ideally, bookkeeping should account for all numbers during reconciliation, i.e. when comparing two sets of accounting records to make sure they are in agreement. However, discrepancies, i.e. unintentional accounting errors can occur, for example due to data entry, or an adding or a rounding error. An organization may use a plug for an immaterial amount, because it may not be cost effective to search through numerous pages of transactions to find the error. The acceptability of a plug depends upon the amount: a plug must be immaterial in order to be justified.

Definition

The most basic definition of a plug may be "a placeholder number which is used in an overall cost or budget estimate until a more accurate figure can be obtained".[2]

Plugging has been described as "the use of false numbers in financial ledgers that forces balances, and effectively masks accounting errors and control deficiencies".[3]

In financial modeling a blogger defined a plug as "an equation resulting from circular reasoning to forcefully tally the balance sheet".[4]

Consequence

Plugging will make an analysis unreliable, resulting for example in a flawed ratio analysis, performance analysis and other attachments on a financial model like equity valuation, budgeting and loan appraisal, debt structuring.[4]

Dependence on plugging has been described as "indicative of a dysfunctional finance and accounting system".[3]

Examples

Accounting malpractice at the US Defense Department was investigated in 2013 by Reuters.[5] At the Defense Finance and Accounting Service (DFAS) superiors ordered accountants to make unsubstantiated change actions and enter false numbers.[6] In the Cleveland DFAS office, unsupported adjustments to make balances agree totaled $1.03 billion in 2010 alone, according to a December 2011 General Accounting Office report.[6]

Difference to creative accounting

Creative accounting may follow the letter of the rules of standard accounting practice, yet deviate by excessive complication creating opaqueness, whereas plugging the numbers deviates from accounting rules for a relatively "immaterial amount".

See also

References

  1. ↑ "Senators Press Defense Department to End "Plugging" Numbers -- false numbers mask accounting and control deficiencies". Senator Charles Grassley. June 12, 2014. Retrieved 16 June 2014.
  2. ↑ "Definitions: P - Management & legal, plug number". Homewyse. Costwyse LLC. n.d. Retrieved 28 July 2016.
  3. 1 2 "Senators Press Defense Department to End "Plugging" Numbers false numbers mask accounting and control deficiencies". Nebraska City News-Press. Gatehouse Media, Inc. 13 June 2014. Retrieved 17 June 2014.
  4. 1 2 Rahul Singh Lamba (November 2011). "Financial Modeling part2 – Anatomy of a Plug". blog. Finaticsonline. Retrieved 28 July 2016.
  5. ↑ Scot J. Paltrow and Kelly Carr (2 July 2013). "Unaccountable-The high cost of the Pentagon's bad bookkeeping". Reuters.com. Retrieved 16 June 2014.
  6. 1 2 Paltrow, Scott (18 November 2013). "Behind the Pentagon's doctored ledgers, a running tally of epic waste". Reuters. Retrieved 17 June 2014.
This article is issued from Wikipedia - version of the 9/14/2016. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.