Question

If there is always a chance of companies "cooking the books" and not report accurate numbers on the financial statements - then are financial statements totally worthless or can they still be of value?

Answer 1

There is a technique which we call it window dressing. In this the company makes the financial statements attractive but that's not the real financial performance or health of the company. The real story is totally different as many things are artificially created and reported to the financial statements as a result of which studying it is worthless. Thus the financial statements that have been window dressed does not have any value. The window dressing can only be done by the excellent accountants. But remember window dressing is a crime and you will be punished if you do it in any company if caught. The ways of window dressing are

• Creation of secret reserves
• Over or under valuation of inventories
• Depreciation methods
• Creation of provisions
• Violating  in accounting concepts and conventions.
• Unrealistic assumtpions
• Creation of Special Purpose Vehicle for a entity

You can find out if financial statements are window dressed or not by the following evaluation

• Valuation of Assets
• Verification and Valuation of inventories
• Verification of Provisions
• Verification of Capital and Revenue.

Hope you have understood the topic well and you got the answer for your question.