That's right. Companies can prepare the books however they want for managing the business internally; GAAP applies only to reporting to outsiders. So a business could really have three sets of books; one for reporting to shareholders, one for tax reporting, and one for managing the business internally. It's not legal to intentionally mislead the public. An outside auditor (if doing their job properly) would not sign off misleading financial statements; an auditor has to express an opinion on whether the financial statements fairly reflect the business's operating results and financial position. Plus, under Sarbanes-Oxley the company's CEO and CFO must certify, under penalty of law, that the financial statements are not knowingly misleading. As far as the IRS is concerned, the issue is simply whether the company has fully reported its revenue and is legitimately entitled to deduct the expenses they have. As long as the revenue and expenses have been reported in compliance with the tax code, the company's obligation is merely to pay the lowest amount of taxes they are required to pay by law. Deducting expenses in order to reduce the tax liability is perfectly acceptable as long as the tax code (or related IRS guidelines or court rulings) permit the deduction. If not, then it's tax evasion, which can result in fines and/or jail time.. In fact, tax evasion is how Al Capone and other gangsters of that time were caught. It could never be proven that they engaged in illegal activities (even though everybody knew they were), but it could be proven that they received income that they didn't report on their tax returns. By using tax evasion to get them, it only had to be proven that they had income that wasn't reported; it wasn't necessary to prove how they got the income. Test tomorrow. :D