What are the ethical issues in keeping two financial records?: One for internal purposes only and another for internal taxes purposes?

Thanks.

Other than the fact that what you are suggesting is a crime - ?

Generally, no ethical issues whatsoever. The key is the portion of your statement, "...for internal purposes only...".

A company's management can, and should, prepare various internal-only financial reports which help them to put the company's operations and finances under a microscope, with a bright light. As long as their externally-published financials are prepared using the proper methodology (e.g. GAAP), and their tax returns are prepared in strict accordance with tax law, then all is well.

When management is looking at the "dashboard" of reports furnished by Accounting, the only criterion is that the reports should be based on whatever methodology is most meaningful for managerial purposes.

For example, when setting bonuses and performance-based compensation payouts within its divisions, a company will frequently charge those divisions with a hypothetical "cost of capital" to reflect the opportunity cost of the resources used by the divisions. This is certainly much more equitable than basing bonuses solely on the profits earned by a division, while ignoring the amount of resources consumed by such division in generating those profits. But, this hypothetical charge doesn't appear in, or affect, the financials which go the bankers and the investors, and it doesn't hit the tax return.

It's just good, solid management.

ArcSine is right that the "internal purposes only" is key to that statement. And no, JudyKay, it's not a crime.

In fact, keeping a different set of books for tax purposes may be necessary, because certain tax laws or methods differ from GAAP. One of the most common examples is depreciation methods, so common that there's actually a place on the corporation tax form to show the difference between tax and book depreciation. There can be differences in when revenue is recognized or whether some expense can even be counted at all, etc.

If the differences between tax and book are few and straight-forward, you can just do the necessary adjustments to get taxes done. But if it gets complicated, you can keep two sets of books. Certainly nothing illegal about it.

What everyone is thinking about is when the externally used statements are incorrect or different from what is actually going on. So if you kept one set of books that was all correct, and then kept another that changed certain items to make them appear better to, say, the stockholders, now you're getting into an issue.

But that isn't what the question asked.

Then I stand corrected. Any time I've heard the "two financial records" statement it's been in a Courtroom.

Many thanks, morgaine300... sincerely appreciated!

JudyKayTee, your initial reaction to the question is understandable. The two- (or multiple-) sets of books thing is like electricity: It's everywhere, and very useful, but you'll never hear anything about it.

But just as morgaine300 pointed out, on those infrequent occasions when it's mis-used, something burns down and it makes big headlines. That's the only time most folks even hear the words "... they were keeping two sets of books... ".

Cheers, all,

Actually that was a perfect answer, I should have phrased question better. It freaked me out whenthe first response I saw was "other than it is a crime."
Am glad to see that got resolved as well.

Yes, I'm glad we got it resolved over a half year ago. (You might want to watch those dates. The search likes to pull out old stuff.)