Voodoo Accounting


DEFINITION of '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.

  1. Cookie Jar Accounting

    A disingenuous accounting practice in which periods of good financial ...
  2. Financial Shenanigans

    Acts or actions designed to mask or misrepresent the true financial ...
  3. Walk-Through Test

    A procedure used during an audit of an entity's accounting system ...
  4. Restatement

    The revision and publication of one or more of a company's previous ...
  5. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  6. Big Bath

    The strategy of manipulating a company's income statement to ...
Related Articles
  1. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  2. Investing Basics

    The Pioneers Of Financial Fraud

    These fraudsters were the first to commit fraud, participate in insider trading and manipulate stocks.
  3. Fundamental Analysis

    Detecting Accounting Manipulation

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

    Detecting Financial Statement Fraud

    Find out how to tell if a company is manipulating its financial data, so you don't invest in the next Enron.
  5. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  6. Fundamental Analysis

    Spotting Creative Accounting On The Balance Sheet

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

    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.
  8. Options & Futures

    Core Earnings Strip Away "Creative" Accounting

    This metric is an attempt to counteract creative accounting, but it poses its own set of challenges.
  9. Retirement

    Common Clues Of Financial Statement Manipulation

    Search for the "bloody" fingerprints in accounting crimes.
  10. Investing

    A Case Study: Earnings Manipulation And The Role Of The Media

    Here we explore why the media focuses on certain earnings manipulation cases in post-Enron Wall Street.
  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center