What Is Backdated Backlog Ratio?
The Backdated Backlog Ratio is not a standard financial metric but rather a descriptive term for a fraudulent accounting practice within the realm of Financial Accounting. It refers to the illicit manipulation of a company's sales pipeline or order book by falsely recording orders or contracts as having been received or finalized at an earlier date than their actual occurrence. This deceptive practice artificially inflates a company's reported Revenue Recognition and backlog figures for a given reporting period, creating a misleading picture of its financial health and operational performance. The intention behind a fabricated Backdated Backlog Ratio is often to meet or exceed analyst expectations, inflate stock prices, or secure favorable lending terms.
History and Origin
The practice of manipulating sales backlogs and backdating contracts has a long history, often surfacing during periods of intense pressure on Public Companies to meet quarterly earnings targets. One notable instance involved Peregrine Systems, Inc., a software company that engaged in a "massive accounting fraud" by, among other things, recording millions of dollars in revenue from non-binding arrangements with resellers. Senior management at Peregrine would determine how much additional revenue was needed to meet or exceed analyst expectations near the end of quarters, then enter into "sham deals" with channel partners, including "backdated contracts and contracts made contingent by oral or written side agreements."7 The U.S. Securities and Exchange Commission (SEC) charged several former senior officers of Peregrine Systems with orchestrating and attempting to conceal this accounting fraud, which led to Peregrine restating its financial results and reducing previously reported revenue by more than $507 million.5, 6 Such schemes violate Generally Accepted Accounting Principles (GAAP) by prematurely recognizing revenue for transactions that are not truly complete or binding.
Key Takeaways
- The Backdated Backlog Ratio describes a fraudulent accounting practice, not a legitimate financial ratio.
- It involves falsely recording orders or contracts at an earlier date to inflate reported revenue or backlog.
- The primary motivation is typically to meet or exceed financial targets and mislead investors.
- Such practices are a form of Earnings Management and can lead to severe regulatory penalties and loss of Shareholder Value.
Interpreting the Backdated Backlog Ratio
While not a ratio to be calculated, the "Backdated Backlog Ratio" describes a symptom of financial misconduct. When evidence of backdating a backlog comes to light, it signals a severe breakdown in a company's Internal Controls and ethical Corporate Governance. For investors and analysts, the detection of such a practice suggests that reported financial results, particularly revenue and accounts receivable, are unreliable. It indicates an attempt to mislead stakeholders about the company's true operational performance and demand for its products or services.
Hypothetical Example
Consider "TechGrowth Inc.," a publicly traded software company under pressure to show consistent quarter-over-quarter revenue growth. As the end of a fiscal quarter approaches, TechGrowth's sales team realizes they are falling short of their internal targets and analyst forecasts. To bridge the gap, the Chief Revenue Officer (CRO) instructs several key sales managers to create "dummy" sales orders for future periods and backdate them to appear as if they were finalized within the current quarter.
For instance, a significant deal for $5 million that was genuinely negotiated but not yet signed for the next quarter is falsely recorded as an order received on the last day of the current quarter. Another $2 million in potential, but non-binding, orders are similarly backdated and added to the "backlog" that is then represented as current revenue. This artificial boost inflates the company's reported revenue for the quarter and makes the backlog appear robust. However, these "sales" often result in rapidly growing Accounts Receivable that may never be collected1234