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

Aggressive Accounting

What it is:

Aggressive accounting refers to an accounting department's deliberate and purposeful tampering with its company's financials in order to outwardly characterize its revenues as higher than they truly are.

How it works (Example):

The practice of aggressive accounting seeks to report a company's revenues as higher than they truly are in order to increase the market value of company stock by presenting attractive figures to current and prospective investors. This usually involves manipulating expenses relative to revenues while failing to disclose losses. Consequently, a company's financial report reflects figures intended to whet investors' appetites to purchase its stock, thereby raising the stock's price. 

Why it Matters:

Aggressive accounting is an insidious method for misrepresenting a company's financials because it can be done following Generally Accepted Accounting Principles (GAAP). For this reason, the presence of such practices may not come to light unless an individual close to the accounting process within a company draws attention to it.

The Enron and WorldCom corporations experienced the devastating consequences of aggressive accounting in the early 2000s when it was revealed that both were systematically inflating revenues in order to have wider appeal among investors.