The corporate accounting practice of taking a reserve to reduce profits in good years and then using that reserve to increase profits in bad years. Also: cookie-jar accounting.
Providing further evidence of warming relations between Microsoft and regulators, the company is preparing to settle a Securities and Exchange Commission case alleging improper accounting.
The 1999 case alleges Microsoft manipulated financial reports by stashing money in reserve accounts. Called "cookie-jar accounting" or "income smoothing," the practice helps portray steady earnings growth that appeals to Wall Street and may boost a company's stock.
Brier Dudley, "Microsoft, SEC talks part of trend to settle," The Seattle Times, May 31, 2002
SEC Chairman Arthur Levitt has made quite a stir, as recently as last Monday, by talking tough about the SEC's assault on so-called "cookie jar" accounting. This, according to Levitt, is when companies create bigger-than-needed reserves during the good economic times "so they can reach into them when needed in the bad times" and thereby make it seem like they've got steady sales and earnings growth.
Herb Greenberg, "What's the Difference Between 'Cookie Jar' and 'Honey Pot' Accounting?",> TheStreet.com, November 20, 1998
As the above citation says, cookie-jar accounting is the fun way of saying "income smoothing." Note, too, that the reserve held by a company in good years is also called a cookie-jar reserve. In fact, this phrase seems to have been the source of cookie jar accounting. On September 28, 1998, the Chairman of the U.S. Securities and Exchange Commission (SEC) gave a speech in which he derided several accounting abuses, including cookie jar reserves:
Miscellaneous "Cookie Jar Reserves"
A third illusion played by some companies is using
unrealistic assumptions to estimate liabilities for such items as
sales returns, loan losses or warranty costs. In doing so, they
stash accruals in cookie jars during the good times and reach
into them when needed in the bad times.
Arthur Levitt, "The 'Numbers Game'," speech, September 28, 1998
The cookie jar reference was taken from the speech and used to create the cookie jar accounting phrase, as the earliest citation (below) makes clear.