The key thing to understand is that Conversion Optimizer is just a user-friendly wrapper around cost per click bidding. It will look to you like you're paying cost per conversion, but you're not, you're paying cost per click.
So, if you start "shaving" conversions (failing to report them), here is what happens:
1) I tell Google I am willing to pay 25 cents per conversion. My website converts 25% of clicks, which for the sake of easy math we'll say is constant. (Conversion Optimizer is a good idea because it is not constant, in particular, because it tends to be different for every source of clicks in ways which are very time-intensive to track yourself.)
2) After Google's system has figured out the above two bits of information, it will figure out "OK, he can pay about 6.25 cents per click. In general, I should bid that much on his behalf in the auction -- avoiding clicks priced at 8 cents, and 'backing up the truck' on clicks priced at 4 cents.")
3) Then you start shaving conversions, so that while your site continues to convert at 25%, you only report a conversion rate of 20%. Google figures "Wow, sucks to be him, he can only afford clicks priced at 5 cents now and still make his 25 cent per conversion desired price. OK, I'll stop bidding on clicks between 5 and 6.25 cents, and continue bidding on clicks priced below 5 cents."
Thus, lying to Google doesn't particularly hurt them, it only hurts you. This is in sharp contrast to real cost per conversion (cost per action = CPA) advertising like affiliate advertising, where you pay for every conversion you report, so shaving conversions means you get money from customers but get to keep it for yourself.
...hence the easier way to "shave conversions" is to designate a lower effective CPA. Instead of saying 25 cents and reporting 20% conversion, you could simply say 20 cents and get the exact same result.
Right, you understand this perfectly. With Conversion Optimizer, shaving is a non-problem: an advertiser who shaves is just doing something they're permitted to do ("bid less for clicks") via a roundabout way.
This throws people for a major loop because Google encourages people to think of Conversion Optimizer as CPA bidding and shaving is automatically a problem for publishers in CPA. In standard CPA, shaving is "not paying for services which you have already received".
Its sort of a leaky abstraction for an advertiser. Conversion Optimizer is described as CPA bidding because that is the easiest way to tell an experienced advertiser what it is. It does, indeed, feel like CPA bidding when everything is going right. But there is CPC bidding going on underneath it, and while that detail is abstracted away it can bite you in the hindquarters if you're not aware of it.
So, if you start "shaving" conversions (failing to report them), here is what happens:
1) I tell Google I am willing to pay 25 cents per conversion. My website converts 25% of clicks, which for the sake of easy math we'll say is constant. (Conversion Optimizer is a good idea because it is not constant, in particular, because it tends to be different for every source of clicks in ways which are very time-intensive to track yourself.)
2) After Google's system has figured out the above two bits of information, it will figure out "OK, he can pay about 6.25 cents per click. In general, I should bid that much on his behalf in the auction -- avoiding clicks priced at 8 cents, and 'backing up the truck' on clicks priced at 4 cents.")
3) Then you start shaving conversions, so that while your site continues to convert at 25%, you only report a conversion rate of 20%. Google figures "Wow, sucks to be him, he can only afford clicks priced at 5 cents now and still make his 25 cent per conversion desired price. OK, I'll stop bidding on clicks between 5 and 6.25 cents, and continue bidding on clicks priced below 5 cents."
Thus, lying to Google doesn't particularly hurt them, it only hurts you. This is in sharp contrast to real cost per conversion (cost per action = CPA) advertising like affiliate advertising, where you pay for every conversion you report, so shaving conversions means you get money from customers but get to keep it for yourself.