Omillio, Cindy Jane s.

BSA-2
10:00am-1:00pm

Management manipulates financial statements for three major reasons. First, in many instances,
CEO compensation is directly linked to the company's financial performance. As a result, they have a
direct incentive to present a rosy picture of the company's financial condition in order to meet established
performance targets and increase their personal compensation. Second, it is a relatively simple task. The
Financial Accounting Standards Board (FASB), which establishes GAAP standards, provides accounting
provisions and procedures a lot more leeway and interpretation. For better or worse, these GAAP
standards provide such a great amount of flexibility, enabling corporate management to create a specific
picture of the company's financial status. Lastly, due to the general relationship between the independent
auditor and the corporate client, financial manipulation is unlikely to be detected by investors. In the
United States, the corporate auditing environment is controlled by the Big Four accounting firms
including several smaller regional accounting firms. While these firms present themselves as independent
auditors, they have a direct conflict of interest because they are compensated by the companies they audit,
often fairly considerably. As a result, auditors may well be motivated to deviate from accounting norms in
order to portray the company's financial situation in a way that impresses the client—and keeps the
client's business.
Manipulation of financial statements could be done in two different ways. The first is to
artificially increase current period revenue and gains, or inflate current period expenses, in order to
enlarge current period earnings on the income statement. This strategy has made the company's financial
condition look more impressive than it is in order to achieve pre-determined objectives. The second
method involves the exact opposite method: deflating revenue or inflating current period expenses to
decrease current period earnings on the income statement. It may seem counterintuitive to make a
company's financial condition seem so worse than it is, but there are many reasons for using it: to deter
future acquirers; to get all of the bad news "out of the way" so that the company will appear better going
forward; to dump the grim numbers into a period when the poor performance can be attributed to the
current overall economy; or to postpone good financial information to a future period when it is more
appropriate; or to postpone good financial information to.In the case of Dell, the company's losses are
manipulated through the first method.
Many incidents of financial manipulation have been documented over the centuries, and
prominent examples such as Enron, WorldCom, Tyco International, Adelphia, Global Crossing, Cendant,
Freddie Mac, and AIG should serve as a reminder to investors. According to the proven incidence and
scale of significant flaws involved with the creation of company financial statements, investors should
exercise extreme caution when using and interpreting them.. Investors should also be warned that the
independent auditors in behalf of providing the audited financial data may have a massive conflict of
interest that is misleading the company's true financial picture. Even auditors' sign-off statements should
be considered with a grain of salt, since many of the corporate wrongdoing incidents mentioned above
occurred with the compliance of the firms' accountants, including the now-defunct firm.