The big bath strategy

A big bath is an accounting maneuver to make poor results look even worse in order to make future results appear better. It is often implemented in a relatively bad year so that a company can enhance the next year’s earnings in an artificial manner. Losses are expanded so that the company can mislead investors and shareholders. Although it is an unethical accounting behavior, its misuse of accounting standards can be done without the need for a breach of law.

The big bath tactic is also applied if a company utilizes an adverse external incident to hide thoughtless attitudes and improper promises of the past. A big bath may also be taken when a management team wants to write off assets that have over-inflated or fraudulent value. The external event is used as an excuse to correct circumstances based on misconduct in previous years. The correction is thus incorrectly explained to conceal improper behavior.

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The coronavirus is undeniably a harmful and detrimental and most of all unforeseeable event. It is a perfect invitation to take a big bath in corona times and to describe past omissions and mistakes as pandemic-related. On the one hand, this clears up the past and, on the other hand, gives the opportunity to create freedom for future profits.

However, adjusting balance sheets, withdrawing commitments, and denying payments due during the pandemic does not automatically prove a link to the pandemic. Instead, a foreign cause may have occurred accidentally during the pandemic. Or, and this will be the far more frequent case, the pandemic may have been taken as a supposedly clever opportunity for a big bath.

The victim of the big bath tactic is by no means without protection. The only limits are a misunderstood respect for the company as a supposed victim of the pandemic. Pandemic damage must therefore be decisively proven and checked for more than just plausibility. Abusing the corona disaster for one’s own benefit does not deserve protection but requires a strict and unyielding approach.