Black Box Accounting – Definition

Cite this article as:"Black Box Accounting – Definition," in The Business Professor, updated March 3, 2020, last accessed August 9, 2020, https://thebusinessprofessor.com/lesson/black-box-accounting-definition/.

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Black Box Accounting Definition

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.

A Little More on What is Black Box Accounting

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.

Reference for “Black Box Accounting”

https://www.investopedia.com/terms/b/black-box-accounting.asp

https://www.accountingtools.com/articles/2018/1/15/black-box-accounting

www.businessdictionary.com/definition/black-box-accounting.html

https://financial-dictionary.thefreedictionary.com/black-box+accounting

https://financial-dictionary.thefreedictionary.com/Black+Box

Academics research on “Black Box Accounting”

The black boxAccounting for program inputs when assessing outcomes, Fein, E. (2017). The black box: Accounting for program inputs when assessing outcomes. In Assessing outcomes in child and family services (pp. 19-27). Routledge.

Schemes for schemata, Keller, J. D. (1992). Schemes for schemata. New directions in psychological anthropology, 59-67.

Does quantity reflect quality? Financial disclosure size and future performance, Jensen, M. R., Marshall, B. B., & Pugh, W. N. (2006). Does quantity reflect quality? Financial disclosure size and future performance. Managerial Finance32(1), 39-50.

A Spreadsheet Solution to Black Box Accounting, Grenci, R., & Grenci, A. (2004). A Spreadsheet Solution to Black Box Accounting. AMCIS 2004 Proceedings, 224. In this research, we look at the problem of tax accounting, fraught with countless rules, but simplified by powerful software solutions. As a pedagogical problem, questions arise as to the most effective means for teaching the tax accounting student. We develop the position that the technology solution lies not in the use of tax software but more so in the use of spreadsheet software. Fitting to a constructivist perspective on learning, spreadsheets allow for the assimilation of building blocks of information that provide a basis for constructing knowledge of a concept.

Annual Report Readability and Earnings Management: Evidence from Chinese Listed Companies, Cheng, J., Zhao, J., Xu, C., & Gong, H. (2018, September). Annual Report Readability and Earnings Management: Evidence from Chinese Listed Companies. In 2018 4th International Conference on Social Science and Higher Education (ICSSHE 2018). Atlantis Press. This paper attempts to find the connection between earnings management and the readability of annual reports. We use STATA15.0 to search data of China’s stock market annual report from 2012 to 2016. This study is based on 1163 listed companies in China stock market, and use Software developed by s Taiwan scholars, it can generate a FOG INDEX assessing the readability of the annual report. We measure earnings management using the modified Jones model and adjusted cash flow accounting. The results show a significant positive correlation between manipulative accruals and the FOG INDEX.

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