By Ann C. Logue
In college, the first quarter of accounting is simply bookkeeping: learning how to do debits and credits, then close out the books and prepare financial statements. It’s important work, but it’s also bound by specific rules. The follow-on classes get into more detail, covering things like the different choices for recording transactions that are allowed under accepted accounting systems. Finally, you get into managerial accounting, where as far as I could tell, everyone can just make up the rules depending on who is up and who is down in the corporate ecosystem.
I did not like managerial accounting. “Creative accounting” isn’t an oxymoron. Accountants have flexibility under GAAP and IASC to choose practices that best fit a company’s needs, and they have many ways to present data to internal and external users of financial statements to help them understand an organization’s financial situation and make better decisions.
But there are limits to the amount of creativity accountants can have while keeping the folks at the SEC out of the way. Baxter International’s accountants couldn’t maintain that line. The SEC says that beginning in 1995, the company rejected the different foreign currency exchange mechanisms in GAAP and developed its own. Then, it extended that custom convention for its managerial accounting, creating intra-company foreign exchange transactions for the sole purpose of generating foreign exchange accounting gains or avoiding foreign exchange accounting losses.
Apparently, transactions were booked after an advantageous exchange rate was recorded. It’s a gorgeous bit of earnings management, but unfortunately the SEC didn’t allow it.
The SEC didn’t uncover the problem; Baxter self-reported it in 2019. The company agreed to pay $18 million in fines, and the two accountants who oversaw the program also paid penalties.
Self-reporting can avoid a lot of hassles with the regulators. One wonders if Baxter’s auditors called for the self-reporting in exchange for signing the financial statements. After all, the company got away with this for about 25 years. That’s an astonishing piece of work.
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