TERM OF THE DAY:Accounting Noise

This refers to the effect of complex and extensive accounting rules that regulate financial statement reporting and are thought to distort a company's true operating performance.

Accounting noise can be seen as either a consequence of necessary rules regarding Generally Accepted Accounting Principles (GAAP) or a result of management's attempts to massage the numbers to present a rosier financial picture of the firm.

For example, a company that has recently undergone a significant merger may look very unprofitable on the income statement; because the merger may cause serious one-time charges for the company, it may be useful for investors to cut through the accounting noise to get a more accurate picture of the company's prospects.

Conversely, an underperforming company could engage in earnings manipulation, creating accounting noise to hide its poor performance.