Creative Accounting Practices Lead to Real Gains – But Investors Beware

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Creative accounting practices can often mean the difference between success and failure for a business, and not just because these accounting practices promote good organizational goals and practices. Presenting financial gains and losses in a certain light can have a huge influence on how investors access the worth of a company. Medallion Financial Corp. took advantage of some particularly interesting accounting practices that ended up raising the value of their company by $5 million, keeping the company’s stock afloat.

Medallion is a prominent lending company in the U.S., specifically when it comes to taxis. Fifty-seven percent of Medallion’s financial portfolio is made up of taxi-cab company lending. Uber and other ride share services have drastically impacted Medallion’s business in the past year, causing the value of Medallion stock to drop by half in the past two years. The firm has survived by diversifying and focusing on other loan opportunities.

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However, even stretching into home improvement loans and recreational vehicles has not been enough to pull Medallion out of the taxi world. With so much infrastructure and management focused towards taxis, restructuring to different loan markets is an arduous task. The company has taken advantage of some brow raising accounting techniques to help them weather the storm.

Medallion focused on its profitable lending venture responsible for home improvement and RV loans. That portion of its company continues to grow, up eight percent this quarter. This increased the value of Medallions assets, so the company was able to report growth overall even as it saw a decline in the taxi business. It overvalued the growth of its banking assets, growing the value of its stock even though that stock’s value is also tied substantially to the success of the taxi industry.

Medallion’s shares grew in value by 43 cents as a result, a growth entirely based on their own pen and paper estimations and not on any actual profit. Yet it still resulted in profit for them. Though this bought Medallion some time, this kind of accounting is potentially dangerous to investors looking for long-term gains. On the consumer accounting side, accountants would do well to consider the source of a stock’s growth before recommending investments in order to prevent exposure to excessive risk.