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Financial
statements reflect the financial health of a company and as
such, these statements should depict the true and fair picture
of a company's financial status. Of late, this has become
wishful thinking as many companies resort to various financial
gimmicks which result in misstating the assets and liabilities,
giving a completely different picture of the companies' financial
performance. Authors Charles W Mulford and Eugene E Comiskey
have focused on various techniques of misreporting assets
and liabilities and their fallout in one of the chapters in
their book `The Financial Numbers Game'.
The
Income Statement and the Balance Sheet of a concern are directly
interlinked, causing a misstatement in one statement to reflect
in the other. Hence, misreported assets and liabilities also
result in a misstatement of net income and shareholders' equity.
For example, if a company decides to capitalize costs, this
would result in expenditures being reported as assets in the
balance sheet. This would enhance the current period earnings.
It
is observed that the operations related assets and liabilities
are the ones usually misstated. The authors go on to add that
other assets could also be misstated, but more often than
not, it is the operation related ones. The companies can play
the financial numbers game by reporting overvalued assets
or undervalued liabilities. The authors examine techniques
of overvaluing assets or undervaluing liabilities as unfolded
in the following paragraphs. |
