What is Black Box Accounting?

Black box accounting refers to the use of complex accounting methods by a company in order to confuse a casual reader or make the interpretation of financial statements extremely difficult. When using black box accounting, companies include extraneous and unnecessary information and use technical jargon excessively just to make the financial statement cumbersome to interpret. Companies deliberately use black box accounting when they want to hide some information or portray themselves as financially stable when they are not. This type of accounting entails complex methods and difficult bookkeeping techniques. When black box accounting is used, investors do not easily detect shady happenings or negative information about the company.

How is Black Box Accounting Used? 

Generally, black box accounting is an unethical accounting practice because it fails to present the accurate financial picture of a company through the use of complex formulas and methodologies. As the name implies, a black box accounting is shady and different from the normal accounting practice. This form of accounting is used to bury and hide unwanted financial problems in a company from its investors. It is quite easy for one to fall into the trap of calling all forms black box accounting illegal because it is used to hide the financial condition of a business, but there are exceptions. Once black box accounting aligns with the guidelines of GAAP and IAS, it is deemed legal.

Black Box Accounting Today

Despite the efforts of companies to hide financial information and make their statement too cumbersome to understand by using black box accounting, this method can not stand the test of time in the world today. Investors only fall for this gimmick for a short while before the realize the true picture of a company. With the aid of numerous systems and electronic financial reports, investors can easily detect whether a financial statement is deliberately made to hide some facts using the black box accounting. Before now, it is often thought that only a skilled person can decide a black-box accounting. Furthermore, the use of this accounting method by companies is significantly reduced, no company wants to take the risk given the introduction of the Sarbanes-Oxley Act of 2002 which stipulates penalties for criminal acts and misconducts by organizations.