NMIMS Banking Management

Manipulation Of Financial Statements

Aniket Rane Niral Shah Deepak Kadam Mayank Bhatia Vivek Kumar Tushar Ambwani

Introduction

Financial statements : necessary sources of information about companies Balance sheet, P&L Statement, Cash Flow etc Users: Company Management, Investors and Creditors government and Revenue Service Portrays companys status Forensic Accounting

Different Types Of Manipulations

1. 2. 3. 4. 5.

Sales Manipulation Expense Manipulation Depreciation Manipulation Asset value Manipulation Mergers & Acquisition Manipulation

Sales Manipulation
Premature revenues Fictitious Revenues
Fake Invoices Bogus Products Recording revenues when buyers payment remains uncertain Buyer lacks Ability to pay Seller provided Financing Unsustainable activities Using onetime events to boost revenues

Expense Manipulation
Net Profit(Loss)=Revenues-Expenses Two Step Process for recording expenses Occurs at the time of expenditure : Capitalization 2. Happens when the benefit is received : Expensed
1.

Expense Manipulation(Contd..)
The different techniques to shift current expenses to later period:
1. 2. 3. 4.

Improperly capitalizing normal operating expense Amortizing costs too slowly Failing to write down assets with impaired value Understating Bad Debts Expense

Manipulation of Depreciation
Benefit of Depreciation: TAX EXEMPTION
Case I Higher depreciation Profit before depreciation Depreciation Taxable profit Tax (35%) Profit after tax (PAT) Cash flow after tax (PAT+Depn) 120 20 100 35 65 85 Case II Lower depreciation 120 10 110 38.5 71.5 81.5

Techniques used for manipulation

Increasing the lifespan of assets Change in method of calculation
Straight line method Written down value method

Revaluing assets

Manipulation of Asset Valuation

Categories of Assets:

Fixed Asset Current Asset

Current Assets are vulnerable for manipulation Categories of Current Assets:

Account Receivables Inventory

Account Receivables Manipulation

Recording of Receivables even when sale are not made Account Receivables and Debtor days keep increasing every
year

Inventory Manipulation
Value of goods that have been manufactured / produced but
not sold. Three Approaches: 1. Overstating Physical Counts 2. Increasing Reported Valuation

3.

Change in method of calculation

Manipulation by use of Acquisition and Merger

What is Acquisitions and Mergers?
1) Acquisitions: When one company takes over another a

new owner is established.

2) Mergers: When two firms of same size agrees to work as a

single unit.

Ways of manipulation
Boosting Cash Flow
The company pays cash for the acquisition 2) The company offers stock of Big Industries
1)

Postponing cash inflow and preponing cash outflows

Do not deposit cheques 2) Give extra credit 3) Pay all the bills 4) Prepay any vendors or suppliers
1)

CONCLUSION

Depreciation Manipulation Mergers & Acquisition Manipulation Asset valueManipulation Expense Manipulation Sales Manipulation INFORMATION??!!

ENRON
WHAT DID THEY DO? 1. 2. 3. Once the seventh largest company in America Used accounting method known as "mark to market. Hedged investments into The Raptors.

WHAT DID THEY PAY? 1. 2. 3. Quarter loss of $618 million Stock fell from $86 to 30 cents Skilling, CFO, was sentenced to 24 years in prison.

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