Aggressive accounting definition
/What is Aggressive Accounting?
Aggressive accounting is the use of optimistic projections or gray areas in the accounting standards to overstate a firm’s financial performance. These actions are taken to give the investment community a falsely enhanced view of a business, or for the personal gain of management.
Examples of Aggressive Accounting
Examples of aggressive accounting practices include the following:
Reserves. Recording a reserve against inventory or receivables that is less than historical experience suggests should be recorded.
Expense deferrals. Recording an expenditure as an asset, rather than charging it to expense as incurred.
Asset inflation. There are a number of ways to increase the recorded value of an asset, which correspondingly reduces the amount of reported expenses. For example, the amount of overhead allocated to inventory can be manipulated, thereby driving up the recorded amount of inventory and reducing the cost of goods sold. Also, the capitalization limit can be reduced, so that more expenditures are classified as fixed assets.
Revenue recognition. Revenue may be recognized before the seller has fulfilled all obligations associated with a sale transaction. Also, a firm acting as an agent may incorrectly recognize sales at their gross amounts, rather than just the commission associated with them.
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Reasons for Aggressive Accounting
A company's management team may engage in aggressive accounting for several reasons. Here are several examples:
Bonus payments. Managers may be paid significant bonuses if they can achieve certain financial results. This is especially the case if the bonuses cannot be rescinded due to subsequent poor financial performance.
Covenant breaches. A loan may be called by a lender if the company cannot meet or exceed certain covenants, which are impacted by its financial results.
Stock price pressure. A publicly-held company may be under pressure from the investment community to continually deliver increased earnings that will in turn increase the company's stock price.
When Aggressive Accounting is Fraudulent Reporting
Some types of aggressive accounting literally reflect the optimistic projections of management, such as for a reduced level of bad debt expense, and can be countenanced by a company's auditors, as long as the accounting can be reasonably justified. In other cases, aggressive accounting is clearly pushing the boundaries of fraud, and can result in an auditor being unable to render an opinion on a company's financial statements without significant changes being made to tone down the impact of management's assertive accounting.
Aggressive accounting may be confined to technical areas where detection is so unlikely that managers may be able to get away with it for a number of years. However, if these practices eventually increase the reported results or financial position of a business to a point well beyond that of comparable companies, it becomes increasingly likely that the accounting will be detected.