Question

Inflating the income and profit is one of the major concerns for investors. For one, it creates false indication on how the company is performing and what the consequences of the operations. While Fannie Mae is still in operation as a company, this should not be gone unnoted. So, how would companies could gain investors’ trust after the fraudulent activity?

Answer 1

Companies do indulge in these fraudulent and unethical practices of inflating profits and income to depict a investor favourable situation. This is done to magnify and enhance market value of shares. Also this sends a positive image amongst investor community that the company is in profits.

Generally these practices continue for a span of 8-10 years and then ultimately the fraud comes out and the company has to be liquidated. There are a number of ways of inflating the profits. But once the fraud comes out, investors' trust is lost and it becomes almost impossible to regain that interest unless the company's management is changed.

So the only possible way of gaining back the trust is to give the management of company in the hands of those people in which investors have high trust. These can be honest beureaucrats who have demonstrated history of turning back loss making companies into profit making concerns.