Use of "Gray" Accounting Questioned

At a time when accounting scandals are filling our courts all the way to the highest court in the land, the use of questionable accounting practices by a start-up company in order to get funding, may offer clues about how companies with world-class reputations and reach began down the path of wrongdoing.

Earthstone International, a private company founded in Santa Fe, New Mexico, in 1993, apparently used questionable accounting principles in an attempt to qualify for the final installment of a funding deal from the State Investment Council. Auditors questioned whether the company qualified for the final $4 million payment when the application for payment was made last fall. Further investigation showed that while Earthstone did qualify under the accounting rules the company used, they failed to meet the revenue trigger for the additional funding when other, more commonly accepted, accounting rules were applied.

According to the Albuquerque Journal, officials described the use of the accounting procedures as a “gray” area but stopped short of saying Earthstone or any of the company’s employees had done anything illegal or even unethical.

“There is no scandal or smoking gun or things of that nature,” former Earthstone CEO Scott Corriveau told the Albuquerque Journal.

Even more telling is a memo sent by an employee to Corriveau and quoted by the Albuquerque Journal: “It appears as though Earthstone has succumb(ed) to meeting financial targets by the ‘whatever it takes’ mentality.”

We are left to wonder how many others have succumbed to similar pressures. We already know where such “gray” accounting leads.

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