Okay, so your client has a restriction against you buying tobacco stocks, but you accidentally did. You now have to sell this stock, but because the price has dropped, your client is out some money. And so, you decide to “make it right,” and deposit company funds to make up for the difference.

Is this transaction a cash flow?

If it’s a cash flow your performance suffers, but is that fair, because you sold the stock before you would have.

Regardless, I would say that you are essentially reversing the trade, which means you’re restoring the account to the condition it was in before the trade was done (essentially acting as if the trade never occurred). I think that the funds are not to be treated as a cash flow. While you cannot alter the official books and records, your records should portray this as a “non event.”

What do you think? Chime in, by commenting below.

p.s., Several years ago I advised a client to purchase a trade order management system; they held off on this roughly $100,000 purchase. A few months later they had a trade error that cost them more than $500,000.

p.p.s., We have received a few comments (see below) that you should read. Steve Campisi suggests that this may “bend the law.” Derek points out that many firms move these trades into their error account. And Jed raises the question about the other side: if the stock’s price goes up!