Cherry Picking

What is Cherry Picking?

Cherry picking in the context of accounting and business refers to two specific practices:

Accounting Practice: Cherry picking in accounting involves selectively presenting only the most profitable transactions while excluding or downplaying loss-making transactions on the balance sheet. This technique is considered a form of window dressing or creative accounting, where the intent is to present a more favorable financial condition of the company to stakeholders.
Business Policy: Cherry picking can also describe a business policy where a company targets and focuses on its most profitable customers, often at the expense of providing adequate service to less profitable or less desirable customers. This selective customer management approach is part of customer profitability analysis.

Examples

Accounting Practice
- A company might record revenue from its highest-performing contracts while deferring recognition of expenses associated with underperforming sections to future periods.
- Another example is a company capitalizing on its primary revenue channels for reports while offloading less productive assets or high-debt transactions off the balance sheet.
Business Policy
- A subscription service may offer premium support and exclusive perks to high-paying customers while providing minimal service to those on lower-tier plans.
- Retailers might allocate more resources and marketing efforts to regions or stores that generate the highest profits while neglecting low-performing areas.

Frequently Asked Questions (FAQs)

Q1: Is cherry picking considered ethical in accounting?

A1: Cherry picking is generally considered unethical as it involves manipulating financial information to present a deceptively favorable scenario, thereby misleading stakeholders such as investors, regulators, and customers.

Q2: How can cherry picking impact a business in the long term?

A2: While cherry picking might provide short-term advantages, in the long run, it can undermine trust, resulting in potential legal action, loss of reputation, and diminished customer loyalty.

Q3: Is cherry picking common in any specific industries?

A3: Cherry picking can be found across various industries, particularly where there is a strong incentive to present financial performance in a particular light, such as in publicly traded companies and financial services.

Q4: Can cherry picking be detected by auditors?

A4: Skilled auditors can often detect cherry picking through forensic accounting techniques and thorough reviews of financial statements, contracts, and transaction records.

Q5: How does cherry picking differ from similar practices like smoothing income?

A5: While income smoothing aims to reduce fluctuations in earnings over different periods, cherry picking selectively highlights the best aspects of financial performance and client relationships, avoiding less favorable data entirely.

Window Dressing: Temporary measures taken to make financial statements look more favorable before they are released to the public.
Creative Accounting: The practice of using accounting rules and financial loopholes to present a company’s financial position in a presumably better light.
Customer Profitability Analysis (CPA): Evaluating the profitability of relationships with individual customers or customer segments to make informed business decisions.
Off-Balance-Sheet: An asset or liability that does not appear directly on the company’s balance sheet but can still hide financial weaknesses or strengths.

Online References

Suggested Books for Further Studies

“Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports” by Howard M. Schilit
“Creative Accounting, Fraud and International Accounting Scandals” by Michael Jones
“Accounting Ethics” by Ronald Duska, Brenda Shay Duska, and Julie Ragatz
“Financial Accounting: An Introduction to Concepts, Methods and Uses” by Clyde P. Stickney and Roman L. Weil

Accounting Basics: Cherry Picking Fundamentals Quiz

### What does cherry picking in accounting specifically involve? - [ ] Highlighting the least profitable transactions. - [x] Highlighting the most profitable transactions. - [ ] Adhering strictly to GAAP principles. - [ ] Presenting all financial transactions equally. > **Explanation:** Cherry picking in accounting involves selectively presenting the most profitable transactions while excluding or downplaying loss-making transactions. ### Which of the following terms is closely linked with the concept of cherry picking? - [x] Window Dressing - [ ] Conservative Accounting - [ ] Income Smoothing - [ ] Tax Avoidance > **Explanation:** Cherry picking is closely linked with window dressing, where financial statements are manipulated to appear more favorable. ### Is cherry picking considered an ethical accounting practice? - [ ] Yes, it is widely accepted as ethical. - [x] No, it is generally considered unethical. - [ ] Only if approved by auditors. - [ ] It depends on the industry. > **Explanation:** Cherry picking is generally considered unethical as it manipulates financial information to mislead stakeholders. ### Which type of analysis focuses on identifying and targeting the most profitable customers? - [ ] Market Analysis - [ ] Financial Analysis - [x] Customer Profitability Analysis - [ ] Competitive Analysis > **Explanation:** Customer Profitability Analysis (CPA) focuses on identifying and targeting the most profitable customers. ### Cherry picking can lead to which of the following long-term consequences for a business? - [ ] Enhanced trust and transparency - [x] Potential legal action and reputation damage - [ ] Guaranteed future profits - [ ] None > **Explanation:** Cherry picking can undermine trust, leading to potential legal action, reputation damage, and loss of customer loyalty. ### Which stakeholders are most likely to be misled by cherry picking in accounting? - [ ] Only internal stakeholders - [x] Investors and regulators - [ ] Competitors - [ ] All employees > **Explanation:** Investors and regulators are most likely to be misled by cherry picking, which presents a deceptively favorable financial position. ### What makes cherry picking distinct from creative accounting? - [ ] Cherry picking is always illegal - [ ] Creative accounting involves realistic presentation. - [x] Cherry picking specifically excludes loss-making transactions. - [ ] Nothing, they are the same. > **Explanation:** Cherry picking selectively excludes loss-making transactions, while creative accounting uses various methods to present company performance in a better light. ### How should auditors approach the detection of cherry picking? - [x] Forensic accounting techniques and thorough reviews - [ ] Blind acceptance - [ ] Ignoring minor discrepancies - [ ] Vague assessments > **Explanation:** Auditors should use forensic accounting techniques and perform thorough reviews to detect cherry picking. ### In which industry is cherry picking less likely to be practiced? - [ ] Publicly traded companies - [x] Small non-profit organizations - [ ] Financial services - [ ] Retail industry > **Explanation:** Cherry picking is less likely in small non-profit organizations as they are not typically under the same pressures to present highly favorable financial outcomes. ### Which of the following can be considered a reactive measure to cherry picking? - [ ] Encouraging more creative accounting - [x] Establishing stricter regulatory frameworks - [ ] Reducing review processes - [ ] Allowing more flexibility in reporting standards > **Explanation:** Stricter regulatory frameworks can help mitigate and prevent cherry picking by enforcing transparent and accurate financial reporting.

Thank you for deepening your understanding of cherry picking in accounting and business policies through our comprehensive guide and challenging quiz questions. Keep aiming high in your financial expertise!