Matt Levine’s Money Stuff: Everything Might Be Accounting Fraud

Settlement accounting

Here’s an accounting trick. You start a company. You sell 20% of the stock to investors and keep 80% for yourself. The company makes widgets; it gets $1 million of revenue from selling the widgets. The company needs raw materials to make the widgets. The raw materials cost $500,000. The company also has various other expenses — salaries and rent and so forth — which total $600,000. In total the company has $1 million of revenue and $1.1 million of expenses, for a negative net income. The economics aren’t great, and the stock won’t be worth very much.

So the trick is, ...