DEFINITION of Black Box Accounting

Black box accounting describes the use of complex bookkeeping methodologies with the intent to make interpreting financial statements time-consuming or difficult. Black box accounting is more likely to be used by companies seeking to hide information that they do not want investors to readily see, such as large amounts of debt, as the information would negatively affect the company's shares or ability to gain access to funding.

BREAKING DOWN Black Box Accounting

Black box accounting is not illegal, as long as it adheres to GAAP or IAS guidelines, depending on the location. However, it is generally considered unethical, as it is designed to obscure a simple and accurate picture of a company's financial health. The use of complex formulas also creates skepticism about the accuracy of the numbers displayed in financial statements.

The expression "black-box," stems from its use in science, computing or engineering disciplines — where a series inputs and outputs come and in out of a box (process), but there's no knowledge of internal workings. More specifically, this is called a "black box approach." In short, the whole process is black, or opaque, hence, black box.

Applied to accounting and financial management, the same methodologies and processes which ordinarily would produce coveted transparent financial statements and results are abandoned with the intent to obscure an interested party.

Black Box Accounting Today

Today, investors and regulators wouldn't stand long for black box accounting trickery. Given the advances in information systems, including electronic financial statements, getting away with weak accounting systems is no longer an excuse. The introduction of the Sarbanes–Oxley Act of 2002 further struck a blow to black box methods. SOX, among many other things, added criminal penalties for certain corporate misconducts. It's likely few accounting executives would willingly employ a black box approach knowing a criminal case could arise.