Friday, September 24, 2010

Hocus-Pocus Accounting

Via Journal of Accountancy - Won the 'JoA Best Article' Award back in 1999.

SEC Chairman Arthur Levitt decried what he termed "accounting hocus-pocus" and called for coordinated efforts to uncover it. He targeted the practice by some companies of improperly boosting reported earnings by manipulating the recognition of revenue. Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transactions involving shipping, billing and/or related-party involvements. Both the SEC and the AICPA seek to increase independent auditors' awareness of problems associated with these practices.
Public companies feel pressure to report quarterly earnings that meet or exceed analysts' expectation—after all, failure to meet those expectations can hurt companies' stock prices. This pressure can lead to practices that sometimes include fraudulent overstatement of quarterly revenue. Any of the improper and unusual revenue-transaction methods used to misstate quarterly revenue also can be used to change annual results. Auditors need to be alert to the whole gamut of warning signs that revenue-recognition fraud may be present.

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