Accounting Gimmicks

     Accounting gimmicks, or fraud take place in the business world all the time, with many

companies practicing these techniques to make themselves look better. Accounting gimmicks can also

be known as “aggressive accounting”, or “accounting shenanigans”; basically all of which would be

considered fraud. They are acts, or techniques that purposefully manipulate or distort a company's

financial statements. They are used to make a company appear more profitable than it really is. These

accounting gimmicks trick investors and stockholders into investing in their company.

     So why do some companies use accounting gimmicks? According to the CFRA (Center for

Financial Research and Analysis), there are three main reasons companies practice accounting

gimmicks. The first reason is it pays to do it, the second is it is easy to do, and the third is they think

they can get away with it.

    

     In regard to the first reason, some managers are influenced to do it by their incentives and

bonuses they would receive based on their financial statement measures. Many times bonuses are

achieved through higher sales and earnings, without much investigation into how those achievements

were made. So managers can receive these bonuses with the help of accounting gimmicks. Also,

manager might not report all of the earnings or profit, if they have already achieved their maximum

bonus. So some managers will defer the extra profits to a later period to help achieve their bonus in

another period.

     Accounting gimmicks can be easy to do considering there are many different accounting

procedures managers can choose from to earn the highest profits possible. The managers who look out

for their own self-interest may choose accounting policies that make them look good, but aren't what's

best for the company. There is a lot of flexibility in GAAP standards and so there is many different

options management can choose that still fall in compliance with GAAP.

      Finally, companies will practice accounting gimmicks because it is fairly easy to not get caught.

Only annual financial statements are audited, not quarterly financial statements. Since this is the case,

most people believe and trust that all financial statements are audited and accurate, and do not check

carefully enough the quarterly reports. Also most private companies are not even audited by an outside

CPA.

     With the examples I just mentioned on how easy it can be to practice accounting gimmicks, it

should be no surprise that many companies have done just that. Of course, not everyone can get away

with accounting gimmicks, and there are numerous examples of companies getting caught. Some of

these cases have brought some of the biggest companies to the ground, and left many innocent people

feeling outraged. Some of the more recent examples of big companies or corporations participating in

accounting gimmicks, include,the Lehman Brothers, WorldCom, and even the U.S. Federal

government.