Why Do Companies Misrepresent Financial Statements?
There are several reasons why businesses may resort to financial statement misrepresentation:
1. Attracting Investors: Companies may inflate their revenues or profits to appear more profitable and attract potential investors. 2. Meeting Financial Covenants: Many businesses have loan agreements that require them to maintain certain financial ratios. Misrepresentation might be used to meet these covenants. 3. Increasing Stock Prices: By showing better financial health, companies can inflate their stock prices, benefiting executives with stock options. 4. Avoiding Regulatory Scrutiny: Understating liabilities or expenses can help avoid penalties from regulatory bodies.