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.

RELATED TERMS
  1. Black Box Model

    A black box model is a system using inputs and outputs to create ...
  2. Black Market

    A black market is economic activity that takes place outside ...
  3. Gray Box

    Gray box is the testing of software with limited knowledge of ...
  4. In the Penalty Box

    In the penalty box is a phrase referring to a company whose stock ...
  5. Black Money

    Black money is payment from illegal activity, usually received ...
  6. Black Thursday

    Black Thursday is the name for Thursday, Oct. 24, 1929, when ...
Related Articles
  1. Investing

    Box Inc. Earnings Are Solid; Its Guidance, Less So

    Despite delivering relatively strong year-over-year revenue growth and hitting its target of generating positive free cash flow (FCF) for the first time, cloud storage  provider Box (NYSE: BOX) ...
  2. Investing

    Box Heading for a Weak Fiscal Q3 Report (BOX)

    Tepid expectations for Box's FQ3 2017 earnings could lead to a sell off Wednesday afternoon.
  3. Insights

    The Best Black Friday Deals

    The best Black Friday deals are already being advertised, with shoppers poised to score serious savings.
  4. Financial Advisor

    4 Ways To Invest In Oil

    Many investors are looking for a way to invest in oil. Find out how you can buy into black gold.
  5. Insights

    Black Friday Sales Figures: Fact and Fiction

    Retailers are eager to cash in on the all-important holiday shopping season. But what exactly should investors make of the ensuing sales figures?
  6. Investing

    Star Wars The Force Awakens a Legacy of Star Destroyer-Sized Revenues (DIS)

    The next installment of the Star Wars saga, The Force Awakens, has just been released. Worldwide revenue is expected in the billions.
  7. Personal Finance

    9 Worst Items to Buy on Black Friday

    If these items are on your holiday shopping list, consider finding a substitute – or don't expect to get the deal of the year.
  8. Investing

    October: The Month Of Market Crashes?

    In the finance world, October is a month to be feared, but is it justified?
  9. Small Business

    Fixing the Credit Gap for Black-Owned Companies

    Black-owned companies face greater obstacles when seeking capital, says a recent Census Bureau study. What to do.
  10. Investing

    Why October Is the Cruelest Month in One Chart

    Black Thursday? Monday? Tuesday? The other Monday? All in October.
RELATED FAQS
  1. How is the stock market affected by Thanksgiving and Black Friday?

    Thanksgiving and Black Friday sales numbers are considered to be important indicators for stock market activity throughout ... Read Answer >>
  2. What does the three black crows pattern mean?

    Learn the basics of the three black crows pattern and how analysts and traders interpret this bearish reversal pattern when ... Read Answer >>
  3. What are the objectives of financial accounting?

    Learn about the principle objectives of financial accounting, including the furnishing of the financial statements for those ... Read Answer >>
  4. What is cost accounting?

    Learn about the main benefits of cost accounting systems, how they are different from financial accounting and why they are ... Read Answer >>
  5. Are qualified dividends included in ordinary dividends?

    Qualified dividends are included with ordinary dividends in Box 1a of the Internal Revenue Service Form 1099-DIV; the box ... Read Answer >>
  6. How do investors and lenders benefit from financial accounting?

    Read about the benefits of financial accounting, including access to information and transparency between companies and their ... Read Answer >>
Trading Center