Question

Tom Smith is the controller of ABC Co. The company has been under a great deal of pressure to meet earnings projections. How might some of the accounts under the assets, liabilities, expenses, and revenues categories be manipulated to inflate earnings?

Answer 1

There are many reasons responsible for manipulation of financials statements like to attract investors by presenting rosy pictures of financial statements, for getting high compensation as corporate executives’ compensation has direct relationship with the financial performance of the company as well as to meet standards specified by accounting boards.in order to meet the earnings projections, the financial statements are manipulated to inflate earnings by inflating current period earnings, assets and cash inflows and deflating current period expenses, liabilities and cash outflows.

Current period revenues can be increased in several ways like recording service revenue before rendering the service, recording revenue before shipment of goods, treating investment income as revenue, treating loan proceeds as revenue.

Current period expenses can be reduced in several ways like changing accounting standards and policies in favor expense reduction, slowing don amortization, treating operation costs as capitalization costs, failure to record impairment losses.

Assets can be increased by operation costs as capitalization costs, changing depreciation or amortization policies in favor of assets exaggeration, changing inventory valuation methods in favor of assets exaggeration.

Liabilities can be decreased by changing accounting assumptions that favors the reduction of current liabilities, changing policies related to creation of reserves, and failure to record accrued expenses.