2+2=5

Charles Munger, Warren Buffet’s business partner once said, “ creative accounting is an absolute curse to a civilisation. The euphemism of creative accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules, but deviate from what those standards intend to accomplish and capitalises on loopholes in the accounting standards to falsely portray a better image of the company.. However, when firms indulge in creative accounting they often distort the value of the information that their financials provide.

Interserve– whose London listed were cancelled on Monday- fall into administration has wiped out the holdings of US hedge fund and of retail investors. Control of Interserve has already been passed to its lenders  which should mean business as usual for suppliers at its main operating companies.

Interserve used supply-chain finance, which allowed suppliers to be paid more quickly by banks if they accept a small discount. The company then pays the full amount back to the banks.

Supply chain finance is totally circular and makes balance sheet look better. The large multinationals pay a small fee for financial institutions to manage lump sum payments more smoothly and efficiently. But can also disguise the company’s mounting borrowings as accountants do not class such facilities as debt, even though money is owed to a bank. Shareholders are unaware if danger lurking in the footnotes to its annual accounts as supply chain finance can flatter balance sheets.