Voodoo Accounting

Dictionary Says

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.
Investopedia Says

Investopedia explains '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.

Articles Of Interest

  1. The Pioneers Of Financial Fraud

    These fraudsters were the first to commit fraud, participate in insider trading and manipulate stocks.
  2. Detecting Accounting Manipulation

    "One-time charges" and "investment gains" are two strategies companies can use to distort their numbers.
  3. 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.
  4. Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  5. 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. Spotting Creative Accounting On The Balance Sheet

    Companies have ways of manipulating their balance sheets that investors should be aware of.
  7. 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. Core Earnings Strip Away "Creative" Accounting

    This metric is an attempt to counteract creative accounting, but it poses its own set of challenges.
  9. Common Clues Of Financial Statement Manipulation

    Search for the "bloody" fingerprints in accounting crimes.
  10. 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.
comments powered by Disqus
Marketplace
Hot Definitions
  1. Racketeering

    Racketeering refers to criminal activity that is performed to benefit an organization such as a crime syndicate. Examples of racketeering activity include...
  2. Lawful Money

    Any form of currency issued by the United States Treasury and not the Federal Reserve System, including gold and silver coins, Treasury notes, and Treasury bonds. Lawful money stands in contrast to fiat money, to which the government assigns value although it has no intrinsic value of its own and is not backed by reserves.
  3. Fast Market Rule

    A rule in the United Kingdom that permits market makers to trade outside quoted ranges, when an exchange determines that market movements are so sharp that quotes cannot be kept current.
  4. Absorption Rate

    The rate at which available homes are sold in a specific real estate market during a given time period.
  5. Yellow Sheets

    A United States bulletin that provides updated bid and ask prices as well as other information on over-the-counter (OTC) corporate bonds...
  6. Bailment

    The contractual transfer of possession of assets or property for a specific objective.
Trading Center