Voodoo Accounting

AAA

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 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.

RELATED TERMS
  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. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  5. Restatement

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

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center