Voodoo Accounting

What is 'Voodoo Accounting'

Creative rather than conservative accounting practices. Voodoo accounting employs numerous accounting gimmicks to artificially boost the bottom line by inflating revenue or concealing expenses or both. The origin of the term “voodoo accounting” probably lies in the fact that once the accounting gimmicks come to light, the purported profits disappear like magic. Investor reaction to news that a company has been engaged in voodoo accounting depends on the magnitude of the offense. While minor, one-time accounting gimmicks may be ignored by investors, substantial repeat offenses would affect the company’s market value and reputation.

BREAKING DOWN 'Voodoo Accounting'

Some of the voodoo accounting practices identified by former SEC chairman Arthur Levitt at the height of the dot-com bubble in September 1998 include:

  • “Big bath charges,” in which a company improperly reports a one-time loss by taking a huge charge to mask lower-than-expected earnings.
  • “Cookie jar reserves” used by a company for income smoothing.
  • Recognizing revenue before it is actually collected.
  • “Merger magic,” whereby a company writes off all or most of an acquisition's price as “in process” research and development.

For example, a company may employ voodoo accounting to prematurely recognize $5 million of revenue and conceal $1 million of an unexpected expense. These tactics enable it to report net income of $2.5 million for the quarter. But a diligent auditor discovers these items in a year-end audit, and the company is forced to restate its results to show a net loss of $500,000, rather than the net income of $2.5 million reported earlier through voodoo accounting.

RELATED TERMS
  1. Chart Of Accounts

    A listing of each account a company owns, along with the account ...
  2. Earnings Management

    The use of accounting techniques to produce financial reports ...
  3. Accounting Practice

    The routine manner in which the day-to-day financial activities ...
  4. Account History

    All activity within an account, usually since inception. In a ...
  5. Linked Savings Account

    Any type of bank savings account that is linked by account number ...
  6. Accountant

    A professional who performs accounting functions such as audits ...
Related Articles
  1. Managing Wealth

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  2. Managing Wealth

    Career Advice: Accounting Vs. Auditing

    Understand the subtle distinctions between accounting and auditing, and learn what each offers a new graduate in terms of salary, job security and daily life.
  3. Investing

    Detecting Accounting Manipulation

    "One-time charges" and "investment gains" are two strategies companies can use to distort their numbers.
  4. Investing

    Creative Accounting: When It's Too Good To Be True

    Accounting practices have matured, but there are still plenty of ways that companies can disguise their financial results.
  5. Personal Finance

    What is an Account Balance?

    An account balance represents the total amount of money in a financial account at any given moment.
  6. Investing

    Spotting Creative Accounting On The Balance Sheet

    Companies have ways of manipulating their balance sheets that investors should be aware of.
  7. Investing

    What is Earnings Management?

    Earnings management is the use of accounting techniques to make a company’s financial reports look better.
  8. Investing

    The One-Time Expense Warning

    These income statement red flags may not spell a company's downfall. Learn why here.
  9. Investing

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
  10. Investing

    Accounting Basics: Branches Of Accounting

    By Bob Schneider Accounting can be divided into several areas of activity. These can certainly overlap and they are often closely intertwined. But it's still useful to distinguish them, not ...
RELATED FAQS
  1. What does it mean when the shares in my account have been liquidated?

    An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. ... Read Answer >>
  2. Is operating profit the same as net income?

    Understand the difference between operating profit and net income, including how each type relates to the other and how both ... Read Answer >>
  3. What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual ... Read Answer >>
  4. What types of revenue are taxable?

    Learn about all the various types of taxable corporate revenue and how different revenues are designated and differentiated ... Read Answer >>
  5. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
  6. What are the main advantages and disadvantages to the cost accounting method?

    Read a brief overview of the main advantages and disadvantages of the cost accounting method as it relates to business analysis ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center