Your reporting practices can help your business avoid the pitfalls of creative accounting. Make sure you can answer these questions
The Idea in Brief
The nightmare of risky accounting is growing more frightening. Facing tremendous pressure—and personal incentive—to report sales growth and meet investors' revenue expectations, managers are issuing increasingly misleading financial reports, especially regarding earnings.
Though not necessarily illegal, these aggressive accounting strategies often hurt shareholders most—leaving them with worthless stock when a company's problems come to light.
Your company's defense against creative accounting calamities? Use reporting practices that are consistent with industry norms and that present a reasonable picture of earnings. And beware of dangerous accounting minefields.
The Idea in Practice
Investors, corporate boards, and managers can spot accounting minefields by asking pointed questions, including:
1. Revenue measurement and recognition. For some businesses, pinpointing when revenue has been earned—and even what constitutes revenue—requires judgment. Some firms record revenue they don't expect to receive until later.
Software producer MicroStrategy immediately recorded revenues it expected to earn over multi-year consulting engagements—rather than spreading revenues over the life of the contract. When the company restated its 1998