What is Black Box Accounting?

Black box accounting is the deliberate use of excessively complex accounting transactions to hide the financial condition of a business. This is most commonly the case when managers want to hide the true extent of the liabilities of an organization, or that it has taken on an unusually large amount of risk that could lead to the incurrence of yet more liabilities. This level of obfuscation may allow a business to acquire additional financing that might have been out of reach if it had presented clearer financial information to the investment community.

The excessive use of off-balance sheet and derivative transactions, as well as the over-use of technical language in disclosures are examples of black box accounting. In these situations, it still may be possible for a financial statement user to discern the actual condition of a business, but doing so requires a detailed analysis of the disclosures that accompany the financial statements. Black box accounting is not necessarily illegal, but it is considered unethical, since management is not trying to give a clear and unadulterated view of the finances of the organization.

Types of Black Box Accounting

There are several ways in which an accountant can engage in black box accounting, which are as follows:

Use complex revenue transactions. Engage in complex revenue transactions, where it is difficult to discern the correct point at which revenue should be recognized. This is most common when a number of disparate deliverables are included in a sales contract, each one with a different delivery date.
Use complex asset inputs. Construct assets that require a large number of inputs, including an array of overhead charges and capitalized interest that are difficult to review.
Alter reserve justifications. Use of a large number of reserves, for which the justifications for account balances are difficult calculations or assumptions that are hard to prove.