Barter, that long-standing tradition of cash-free exchange of goods and services, has awakened regulators worried about accounting fraud. Partly in response to the current climate of corporate malfeasance, the SEC has started to increase its scrutiny of barter transactions.
Companies that barter risk SEC action when they exchange goods and services at a price well above fair market value and when the goods received go unused or unsold. Either scenario paints a picture of bartering solely for a revenue boost, a legal no-no for public companies. Adrienne Miller, the SEC enforcement accountant in San Francisco, cites an egregious example whereby a company unloaded obsolete inventory for Internet advertising credits it never used. "It was an accounting gimmick to avoid writing the inventory off as a loss," Miller says.
But while the SEC works to keep public companies in line, private companies have to worry about the image a barter-heavy income statement projects. Potential investors and lenders are likely to cast a jaundiced eye, says Kevin Pianko, a partner with Richard A. Eisner LLP, a New York City accounting firm. "Banks looking to lend will be concerned about the quality of earnings if the company is asset-based or, if they're relying on cash flow, the amount of cash activity vs. barter," Pianko says.
To prove legitimacy, you can hire independent appraisers to set the market price of goods and services involved. But that expense may outweigh the benefits of the transaction. "We only sue when fraud is intentional," says Helane Morrison, district administrator for the SEC in San Francisco. "We would not sue if the facts showed an honest mistake."
- Richard A. Eisner LLP
San Francisco District Office, (415) 705-2467