American Renal Associates Holdings, Inc. (ARA) is one of the largest national providers of
dialysis care in the United States. The case I found against the company alleges that they used
the cookie jar technique in the fraudulent scheme. According to the SEC complaint, ARA had a
two-step process to recognize revenue. This involved estimating the amount of payment from
insurance companies which they called a contractual allowance, and second, making topside
adjustments after receiving information about the actual payment amount (Complaint, 2021).
Topside adjustments are journal entries that reflect actual cash received and are generally
within the scope of GAAP. However, it was used in this case to perpetrate ARA’s fraud. This
caused ARA to overstate its revenue, net income, and financial metrics. The SEC has charged
the ARA and three of its former senior executives with revenue manipulation schemes. “In
September 2019, ARA issued restated financial statements which, among other things, reflected
that it had overstated net income by more than 30% for 2017 and by more than 200% for the
first three quarters of 2018” (Securities, 2021).
Earnings Management is a technique companies use to create the appearance of a favorable
financial position by inflating or smoothing earnings. The disingenuous accounting practice used
in the case of ARA is known as the cookie jar. It is a revenue manipulation scheme where the
business sets up a reserve account to hold estimated adjustment amounts to recognize and dip
into the ‘cookie jar’ when needed (Mintz & Morris, 2020). In this case, the motivations behind
earnings management appear to be to meet or beat the predetermined financial metrics.
References
Complaint sec v. ara. (2021). SEC. https://www.sec.gov/litigation/complaints/2021/comp-
pr2021-
252.pdf
Mintz, S. M., & Morris, R. E. (2020). Ethical obligations and decision making in accounting
(5th ed.). McGraw Hill Education.
Securities and Exchange Commission. (2021). SEC charges dialysis provider and three former
senior
executives with revenue manipulation scheme. SEC. https://www.sec.gov/news/press-
release/2021-252
