What do companies gain by resorting to manipulative accounting techniques?

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justaguide's profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

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Businesses have a large amount of financial data to be processed. Some of the basic categories under which it falls include purchases, sales, wages, interest payments, dividends, depreciation, etc. These have to be carefully recorded over the entire financial year and at the end of the year the information is analyzed to estimate the revenues and expenses of the company and later used to determine the profits made. Businesses have to pay corporate income taxes based on the profits made by them. To avoid paying or to reduce the tax liability, manipulative accounting techniques are used quite often.

Publically listed companies are obliged to send the annual balance sheet to all their shareholders who use the information provided to determine the financial health of the company, how much it is actually worth and what is the return on equity that they can expect. Manipulations are done here to show increased profits or assets and make investors feel that the management of the company is doing a fine job.

Showing better financial results allows the management to increase their salary and take extra perks and bonuses. Wrongly reported data can also influence the stock price of the company which can be used to their advantage by the management of the company.

Some famous examples of fraud where financial information was manipulated include scandals involving large corporations like Enron, Qwest, WorldCom, Sunbeam, etc.

syamaladevi's profile pic

syamaladevi | Student, Undergraduate | (Level 2) eNoter

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Businesses have a large amount of financial data to be processed. Some of the basic categories under which it falls include purchases, sales, wages, interest payments, dividends, depreciation, etc. These have to be carefully recorded over the entire financial year and at the end of the year the information is analyzed to estimate the revenues and expenses of the company and later used to determine the profits made. Businesses have to pay corporate income taxes based on the profits made by them. To avoid paying or to reduce the tax liability, manipulative accounting techniques are used quite often.

Publically listed companies are obliged to send the annual balance sheet to all their shareholders who use the information provided to determine the financial health of the company, how much it is actually worth and what is the return on equity that they can expect. Manipulations are done here to show increased profits or assets and make investors feel that the management of the company is doing a fine job.

Showing better financial results allows the management to increase their salary and take extra perks and bonuses. Wrongly reported data can also influence the stock price of the company which can be used to their advantage by the management of the company.

Some famous examples of fraud where financial information was manipulated include scandals involving large corporations like Enron, Qwest, WorldCom, Sunbeam, etc.

 

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