Did Google Lie About The Tax Rate?

    February 1, 2006

DMV at MemeStreams has a theory that I find both shocking and believable, that Google borrowed against its tax rate the previous three quarters, leaving us with the whopping tax rate in the final quarter.

This is what really looks like what happened. If Google doesn’t have enough accounting talent to completely understand their tax situation, someone should go to jail. Instead, to hit expectations in previous quarters, they borrowed against their tax rate. They previously reported taxes of 30%. But you only get to do that 3 out of 4 quarters. Then you get a tax rate of almost 42% to compensate.

– if, as I said above, they deliberately moved their taxes at the expense of a later tax burden, should they have been explicit about it? A good financial analyst would have known about the tax burden of the quarter; but wouldn’t necessarily know whether the company’s projections were based on that. Which they were not.

To explain: What DMV is saying is that Google may have reported a tax rate of 30% each of the previous 3 quarters in spite of having a different tax rate, and only accounted for the true tax in the last quarter. In that scenario, Google’s final tax rate didn’t have a 40% increase, it was just the aggregate increase of an entire year collected into a single quarter, a correction for the creative accounting.

If that is indeed what Google did, I don’t know the financial markets well enough to know if this is common practice. If it, I can’t blame them, but I can still be surprised. This is the sort of thing I’d want to know ahead of time, as an investor, and that I’d want explicitly stated in the fourth quarter report. Google hasn’t said whether they borrowed against the tax rate, so if they did, that would be holding back information about creative accounting from shareholders. Thusly, if Google were engaged in creative accounting, I would dump the stock immediately and not even consider buying it again.

Does anyone think this was the case? I wonder how plausible this theory is.

Nathan Weinberg writes the popular InsideGoogle blog, offering the latest news and insights about Google and search engines.

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