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9 Signs of Potential Creative Accounting Practices

by Aspen Law and Business: Accounting Irregularities and Financial Fraud
Here are nine things investors should watch for as possible warnings of accounting gimmickry: 1. Overly Aggressive Performance Targets: The company ups the ante by continually setting revenue and earnings growth targets that are far ahead of its competitors'. 2. Overly Aggressive Management: The company's corporate leaders are known to be hard-driving types who have a flair for self-promotion. 3. Big Upward Change in Accounts Receivable: This could be a sign a company is trying to pad revenue; look for more explanation.4. Big Downward Change in Reserve Account: It could be the product of overly optimistic assumptions about things like collection of unpaid debts.5. Big Upward Change in Inventory Account: A favorite accounting gimmick is to overvalue inventory or create nonexistent inventory. 6. Changes in Accounting Policies: Companies should provide detailed explanations for any changes in accounting treatments. 7. Frequent One-Time Charges: These could be a sign the company is trying to disguise some recurring charges as nonrecurring items. 8. Frequent Related-Party Transactions: These could be a sign of potential conflicts of interest if they involve loans or other transactions with corporate officers.9. Premature Revenue Recognition: Booking sales before goods are actually sold, or by immediately booking all the proceeds of a long-term contract.
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