Question

Is a company withholding their debt from their financial statements is unethical? I think its a huge risk for companies because what happens if it doesn't work out and your company fails Who will pay the investor back?

Answer 1

Solution

Is a company withholding their debt from their financial statements is unethical Preparing and maintaining precise and reliable financial statements are the essence of fair financial reporting. However, as practice shows, many companies are looking for ways to present their financial standing in a better light rather it actually is. The purpose for such unethical behavior could be an intention to increase a company's market capitalization, ease off the debt load or simply avoid paying dividends or fulfill contract obligations to its partners.

Things to Watch

The most common way to present things in a better light is to increase earnings and hide costs.

A simple way to boost earnings in income statements is to recognize revenues earlier than they actually occur. Fraudulent asset valuations happen when companies utilize off-balance sheet financing or create hidden reserves to show minimal income.

These are the unethical accounting practices to watch for on financial statements.

The investor back

If you run an unincorporated business as a sole trader and take a business loan from a third party (e.g. bank, friends family, angel investor, VC etc) you are personally liable to repay these loans even if the business fails

This is why founders set up limited companies as that limits the liabilities of the founder and later shareholders to the cost of the shares they are subscribing for

The founder has an employment agreement with the company and initially owns 100% of the shares in the company