Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Voodoo Accounting

What it is:

Voodoo accounting refers to any accounting practices that artificially inflate the profits reported on a company's financial statements.

How it works (Example):

Voodoo accounting comprises a wide range of unethical and unprofessional methods for making a company's profits appear larger than they really are. These methods manipulate revenues by falsely boosting them, or costs by dishonestly lowering or concealing them. The term "voodoo" refers to the magical disappearance of such artificial profits once they've been discovered and once the true cost and revenue figures have been revealed.

To illustrate, suppose company XYZ's accountants find that they can report a $1 million profit for a given quarter by concealing a $250,000 electrical cost as well as a $250,000 lawsuit settlement (without which, the total profit would only have been $500,000). Later, auditors find a discrepancy between the records for these two costs and the figures accounted for on the company's income statement for the same quarter. As soon as it is determined that the settlement and electrical costs were not reported, the $1 million disappears like "voodoo" magic.

Why it Matters:

Voodoo accounting practices are an unprofessional attempt on the part of accountants (or managers) to reflect an untrue picture of a company's financial health. Regardless of how it is done, the truth inevitably prevails hurting the company and its reputation.