What is Voodoo accounting?
"Voodoo accounting" is a slang term that refers to a system for inflating a company's profits.
“Voodoo accounting” is a slang term that refers to a system for inflating a company’s profits. Unscrupulous and/or outright illegal financial record-keeping methods are used to boost a company’s bottom line, primarily to please current investors and attract new investors.
It may be used to conceal a company’s losses or to provide a false representation of a company’s actual financial situation. The term refers to the voodoo magical practice. Money and/or money issues are magically made to appear or disappear with voodoo accounting.
When the nefarious accounting tactics of companies such as Enron became public in the early 2000s, it gained true, critical attention and focus.
This procedure is not only unethical, but also unprofessional. This is because companies that use this technique intentionally mislead investors and analysts into believing that they are far more profitable than they are. Accounting ruses are difficult to pull off for companies subjected to higher levels of scrutiny. This is more common in smaller, less well-known public companies.
Voodoo Accounting Practices:
Accounting techniques that are innovative are not new. At the height of the dotcom bubble in the late 1990s, former Securities and Exchange Commission (SEC) Chair Arthur Levitt identified the following voodoo accounting practices:
- Big bath charges: This technique entails incorrectly reporting one-time losses. Companies accomplish this by taking a large charge to conceal lower-than-expected earnings.
- Cookie jar reserves: This gimmick is used by businesses to smooth out their income. Recognizing revenue before it is received.
- Merger magic: When a company uses this trick, it deducts all or most of the acquisition price as in-process R&D.