Question

How can options be used to manipulate figures in the balance sheet?

Why would management be tempted to do so?

Answer 1

Manipulation of financial statement is altering the figures in financial records to present a false picture of its financial position, There are two types of manipulations

1. Exaggerating current year profit thereby making the financial statements look better than actually it is.
2. Deflating current year revenue or inflating expense to make the financial condition looks worse there are many reasons to do so; to dissuade potential acquires or to evade tax.

Most of the companies manipulate their financial statements inorder to show a positive picture which attracts the investors and to avail other loan benefits. Manipulation can be done in several ways either by inflating revenues or by deflating payments.The common options being used to manipulate financial statements are listed below:

• Recording Ficticious assets
• Failing to record or improperly reducing liabilities
• Shifting current year expense to previous years
• Capitalising normal operating costs in order to reduce expense by moving them from profit & loss statement to balance sheet
• Showing investments as revenue
• Failing to record all the incurred expenses of current year

Some of the manipulations can be found on auditing of the financials or from scrutiny of accounts.

Reason to manipulate financial statements:

1. To show a positive picture of the company and to acquire financial gains through it
2. To avoid tax payment
3. Not having adequate knowledge of accounting
4. To attarct investors to make investment in company
5. To share extra bonus from the company.