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So Far Just Some Fraud. Phew.

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By teacherjh
August 20, 2002

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[msg 49004]
The exact percentage is not important, "from little lies grow big lies" or fraud.

You are assuming that every discrepancy is a lie. This is not so, especially in accounting. It's a funny thing - accounting is a very precise looking art. It uses numbers, which have firm rules for how they add and divide. Everything is orderly, there are categories and cubbyholes, everything has its place, and there is a certain comfort to seeing a result like $35,247,325,928.44 at the bottom of something. Imagine that! Exact to the forty-four cents.

But behind it all is a lot of inherent fuzziness. Most expenses can be allocated reasonably several ways, many items serve multiple purposes, sometimes the intended object is incidental to the purpose of an expenditure, and this is just a reflection of the fact that you are attempting to account for the "real world", which is, in a word, messy. Advertising and publicity for example are two different things, but they overlap. Goodwill (brand identity, for example) is clearly valuable, but un-value-able. A trip which accomplishes several objectives of differing importance, can be allocated several different ways among those objectives, each of which is reasonable. But they lead to different numbers, belying the precision with which they end up accounted for.

Precision and accuracy are two different animals. Accounting is very precise, but is inherently inaccurate. It is one of the frustrations that stymies me every April. I can't shake the feeling that I've left something out of my 1040, that something's out of place, that I haven't met the precision of the numbers I've put down. But with more than one business and a few other complicating factors, it is just not possible to be as precise as the figures one puts down implies.

It is just not true that differing with a reasonable person on the numbers implies lying and incipient fraud.

In accounting for certain transactions as advertising, there could be several reasons for it:

1: Management knew that Internet advertising was not going anywhere, but tried to show rocketing interest. Small (but rapidly increasing) numbers succeed in doing this and imply a new, giant growth engine that does not and will not exist.

2: Management believed that Internet advertising was going to be big, (and it might still be), and the deals being struck were in fact laying the foundation for the growth. It makes sense in this case to account for it as advertising, because that is where the money is going anyway.

3: Management didn't know what the future was, and faced with accountants, had to "put it somewhere". How many of you (in business) have wondered whether business cards are advertising, an office expense, employee overhead, or should be accounted for in its own category? It's gotta go somewhere.

4: Other reasons I can't think of as fast as I am typing.

In any case, I'm not saying which happened. I'm just saying that the existence of an accounting disagreement does not by itself imply fraud.


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