A plug, also known as reconciling amount, is an unsupported adjustment to an
accounting record or general
ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
. Ideally, bookkeeping should account for all numbers during
reconciliation
Reconciliation or reconcile may refer to:
Accounting
* Reconciliation (accounting)
Arts, entertainment, and media Sculpture
* ''Reconciliation'' (Josefina de Vasconcellos sculpture), a sculpture by Josefina de Vasconcellos in Coventry Cathedra ...
, 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
Data entry is the process of digitizing data by entering it into a computer system for organization and management purposes. It is a person-based process and is "one of the important basic" tasks needed when no machine-readable version of the inf ...
, or an adding or a
rounding error
A roundoff error, also called rounding error, is the difference between the result produced by a given algorithm using exact arithmetic and the result produced by the same algorithm using finite-precision, rounded arithmetic. Rounding errors are d ...
. 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".
Plugging has been described as "the use of false numbers in financial ledgers that forces balances, and effectively masks accounting errors and control deficiencies".
Consequence
Plugging will make an analysis unreliable, resulting for example in a flawed
ratio analysis
In mathematics, a ratio shows how many times one number contains another. For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ...
,
performance analysis and other attachments on a financial model like
equity valuation
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit fr ...
,
budgeting
A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmen ...
and loan appraisal, and
debt structuring
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The de ...
.
Dependence on plugging has been described as "indicative of a dysfunctional finance and accounting system".
Examples
Accounting malpractice at the US Defense Department was investigated in 2013 by Reuters.
At the
Defense Finance and Accounting Service
The Defense Finance and Accounting Service (DFAS) is an agency of the United States Department of Defense (DOD), headquartered in Indianapolis, Indiana. DFAS was established in 1991 under the authority, direction, and control of the Under Secreta ...
(DFAS) superiors ordered accountants to make unsubstantiated change actions and enter false numbers.
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
The U.S. Government Accountability Office (GAO) is a legislative branch government agency that provides auditing, evaluative, and investigative services for the United States Congress. It is the supreme audit institution of the federal gover ...
report.
Difference to creative accounting
Creative accounting
Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distortin ...
may follow the letter of the rules of
standard accounting practice
Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
, yet deviate by excessive complication creating opaqueness, whereas plugging the numbers deviates from accounting rules for a relatively "immaterial amount".
See also
*
Fudge factor A fudge factor is an ''ad hoc'' quantity or element introduced into a calculation, formula or model in order to make it fit observations or expectations. Also known as a "Correction Coefficient" which is defined by:
: \kappa_c = \frac
Examples ...
References
{{reflist
Accounting in the United States
Accounting terminology