Accounting Noise

Accounting Noise can be defined as the distortion or disturbance that occurred within the financial statements of a business entity or a business corporation due to the lack of following accounting rules and regulations that must be followed to maintain accurate financial statements. Due to the presence of accounting noise the true financial position of a company becomes uncertain and it becomes difficult for the investors to estimate the financial condition or financial health of the company. Sometimes the companies use accounting noise to make the financial statements look better where as in certain other conditions the accounting noise make the financial statements to look even worse.

Accounting noise can be the result of the implementation of the necessary accounting principles that come under the Generally Accepted Accounting Principles and must be implemented in order to make accurate and legal financial statements of a company. On the other hand it can be an attempt from the management of the company to put a brighter and the rosier picture of the company’s financial statements in front of investors and credit companies. Investors can scrutinize the foot notes of the financial statements to identify the accounting noise and to get a clear and transparent picture of the financial condition of a company.

For example in order to get an idea of accounting noise we can have an example of a company ABC that has gone through a merger in recent times. Due to merger to some strong company the income statement of the company ABC may seems to be very attractive to the investors because the merger may have increase serious one time charges of the company however the investor must cut through the accounting noise to get a clear picture of the company’s financial condition at the moment.

 

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