Larry’s Laws of Larceny- Law 17: The Confusing Transaction is Often the Fraudulent Transaction

Larry Beebe, CPA

Accounting transactions can be very complex. For example, the use of derivatives in an investment can tremendously increase the risk in what appears to be a conservative asset purchase. Generally accepted accounting principles often allow transaction to be recorded in an entity’s accounting records in many different ways. Some of these ways are conservative, and some employ very liberal accounting. Unfortunately, these transactions can be manipulated in a fraudulent manner to make an entity appear healthier than it actually is.

A classic case of accounting fraud was the Enron Corporation which filed for bankruptcy in 2001. Enron executives created a series of complex accounting transactions that were confusing to accountants, investors, and to financial analysts. When the fraud unraveled billions of dollars had been lost.

Plan trustees are often faced with decisions as to whether to invest in very complex transactions. The best advice may be that of investor Warren Buffett, “I never invest in a business that I do not understand.”

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