Some companies have been guilty of "boosting the balance sheet," which can be a company's attempt to present a strong financial position to investors. Manipulation of the balance sheet essentially results in an overvaluation of the company assets. In your discussion, post an original response to the following questions:
Why would a company be tempted to manipulate the balance sheet?
What are the long-term indications for a company or economy when this occurs?
How a manager might identify and respond when overvaluation has been attempted?
The higher-paid executives who run major corporations can be
tempted to “cook the books” on their financials for several
potential reasons, such as:
1. Feeling intense pressure to show a positive picture
Often, it’s not the case that they are inherently evil people who
delight in deceiving the public. It’s more often the case that they
simply give in to the enormous pressure they’re under, being paid
outrageous sums of money and expected to direct their company to
ever-increasing growth and profitability, amid an increasingly
competitive business landscape.
2. Tapering investors’ expectations
There are several situations that may make it tempting for a CEO to
manipulate a company’s financials a bit. It might be something as
relatively innocent as not wanting investors to develop unrealistic
expectations. Let’s say the company just flat out got lucky on a
number of fronts, and it ended up achieving, by far, its best year
ever.
But then the CEO starts thinking, “If we print these numbers, as
is, then our investors are going to expect to see over-the-top
results all the time. If we just show an average year, then when
they see those numbers, they’re going to think something’s wrong
and start jumping ship.” So, he makes the CFO change the date on a
couple of major sales so that revenue gets pushed forward to the
next fiscal year, making the current fiscal year look just a little
less promising.
In the example above, the guilty party isn’t even manipulating the
numbers to try to make the company look better – instead, he’s
making it look worse. And his motives aren’t terribly nefarious –
he’s not actively scheming to rip someone off.
3. Triggering executive bonuses
A very common motivation for manipulating financial statements is
to meet sales/revenue goals that trigger a big bonus for
upper-level management. The structure of such incentive bonuses has
often been criticized as being, in effect, an incentive for an
executive to “cheat.”
Perhaps, major corporations might consider doing away with bonuses
paid out that way. Instead, they might offer performance bonuses
based on a non-financial metric. For example, the CEO and CFO could
be paid bonuses if customer service satisfaction rises five
percentage points.
Contributing Factors
1. The lack of standardized accounting standards
Along with the structure of management incentives, there are other
factors in play that appear to contribute to an environment where
fraud is almost commonplace. One of the factors is the lack of
standardized accounting standards.
It was thought that the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) would’ve long since set aside their differences and come to an agreement on a single set of universally recognized accounting practices.
Unfortunately, as of 2020, it looks less and less likely that such a universal set of practices and standards will ever be carved out. The lack of consensus on exactly how corporate accounting should be completed makes it easier for dishonest people to get away with being dishonest.
2. Conflicts of interest relationship between companies and
accounting firms
The Enron scandal clearly pointed out another contributing factor
to financial statement manipulation – the often too close, filled
with potential conflicts of interest relationship between companies
and the accounting firms that audit them.
How Financial Statements Are Manipulated
Manipulation of financial statements always involves doing one of
two things – either manipulating records to inflate apparent
revenue or manipulating them to reduce apparent expenses or
liabilities.
More specifically, here are some of the accounting tricks used to provide a false picture of a company’s actual financial condition:
Recording revenue prior to supplying goods or services
Reporting income from investments or capital obtained by taking out
a loan as business revenue
Capitalizing ordinary business expenses, thus shifting them from
the income statement to the balance sheet
Inaccurately reporting liabilities – or altogether neglecting to
report them at all
A surprisingly simple method of manipulating financial statements is that of inflating assets with false inventory count values. For example, a company may do an ordinary inventory count, but then add 100 items to each count – so, 500 desktop computers become 600 desktop computers, or 150 computer monitors become 250 monitors, etc.
If the average inventory item value is $350, and there are 10 categories of items, then, using such a creative inventory addition technique, the company can quickly increase the value of its total assets by $350,000.
How to Protect Yourself From Financial Statement
Manipulation
Individual investors need to do all they can to avoid being the
victim of financial fraud, including fraudulently altered financial
statements. The best way to do it is simply to obtain a strong
financial education.
Knowing how to read and understand the three main financial
statements – the income statement, the balance sheet, and the cash
flow statement – will enable you to more easily spot when some of
the numbers don’t quite seem to add up.
Understanding the actual components of the income statement, for
example, will also help you to better assess the validity of the
projections the CEO makes during the “guidance” and Q&A
portions of a company’s earnings call.
Some companies have been guilty of "boosting the balance sheet," which can be a company's attempt...
On September 25, 2012, Japanese camera and medical equipment maker Olympus Corporation and three of its former executives pleaded guilty to charges related to an accounting scheme and cover-up in one of Japan’s biggest corporate scandals. Olympus admitted that it tried to conceal investment losses by using improper accounting under a scheme that began in the 1990s. The scandal was exposed in 2011 by Olympus’s then-CEO, Michael C. Woodford. As the new president of Olympus, he felt obliged to investigate...
On September 25, 2012, Japanese camera and medical equipment maker Olympus Corporation and three of its former executives pleaded guilty to charges related to an accounting scheme and cover-up in one of Japan’s biggest corporate scandals. Olympus admitted that it tried to conceal investment losses by using improper accounting under a scheme that began in the 1990s. The scandal was exposed in 2011 by Olympus’s then-CEO, Michael C. Woodford. As the new president of Olympus, he felt obliged to investigate...
Case: Enron: Questionable Accounting Leads to CollapseIntroductionOnce upon a time, there was a gleaming office tower in Houston, Texas. In front of that gleaming tower was a giant “E,” slowly revolving, flashing in the hot Texas sun. But in 2001, the Enron Corporation, which once ranked among the top Fortune 500 companies, would collapse under a mountain of debt that had been concealed through a complex scheme of off-balance-sheet partnerships. Forced to declare bankruptcy, the energy firm laid off 4,000...
CASE 20 Enron: Not Accounting for the Future* INTRODUCTION Once upon a time, there was a gleaming office tower in Houston, Texas. In front of that gleaming tower was a giant "E" slowly revolving, flashing in the hot Texas sun. But in 2001, the Enron Corporation, which once ranked among the top Fortune 500 companies, would collapse under a mountain of debt that had been concealed through a complex scheme of off-balance-sheet partnerships. Forced to declare bankruptcy, the energy firm...
Respond to the following prompt with your original
thoughts, at least 200 words, utilize academic sources to support
your point.
Is the WACC an estimation of the real cost of capital(explicit
cost of money) or an opportunity cost tied to a particular decision
based on market required returns? You use the following points to
discuss this question or utilize your own points.
1. Projects of different levels of risk should have different
associated discount rates.
2. The WACC reflects the...
Discussion questions
1. What is the link between internal marketing and service
quality in the airline industry?
2. What internal marketing programmes could British Airways
put into place to avoid further internal unrest? What potential is
there to extend auch programmes to external partners?
3. What challenges may BA face in implementing an internal
marketing programme to deliver value to its customers?
(1981)ǐn the context ofbank marketing ths theme has bon pururd by other, nashri oriented towards the identification of...
The discussion: 150 -200 words. Auditing We know that computer security audits are important in business. However, let’s think about the types of audits that need to be performed and the frequency of these audits. Create a timeline that occurs during the fiscal year of audits that should occur and “who” should conduct the audits? Are they internal individuals, system administrators, internal accountants, external accountants, or others? Let me start you: (my timeline is wrong but you should use some...