Potential manipulation of financial statements & its impact

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Let’s be careful about Potential manipulation of financial statements & its impact :

Let’s be careful about Potential manipulation of financial statements & its impact Dr. Abhijit P. Phadnis

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About the Author Dr. Abhijit Phadnis B. Com, ACMA, ACA, ACS, CFA, PhD (IITB) Dr. Abhijit Phadnis is a Chartered Accountant, Cost Accountant, Company Secretary and Chartered Financial Analyst, with a high all-India rank in all these examinations; having stood 11 th , 2 nd , 1 st and 3 rd respectively. He was also awarded a Ph.D. by IIT, Mumbai, and his thesis has been published by a German academic publisher for sale globally. He is a rank-holding graduate in Commerce, from the University of Mumbai . Abhijit began teaching management students in 1985. He has conducted over 250 executive education programs for over 40 reputed Indian companies, and has always received outstanding feedback for his teaching skills. One consistent feedback from all the participants is that Abhijit makes complicated things simple! Currently, Abhijit is a visiting faculty with the School of Management at IIT, Mumbai . Abhijit blends his teaching with a lot of practical insights, obtained through his 28-year professional and consulting career. He has worked for reputed firms like Johnson & Johnson, Grindlays Bank as well as for two Swiss Banks - UBS & Credit Suisse. He was a Director with the Indian subsidiaries of these two banks and was in-charge of all the business support functions in India. He has also served on the Board of a reputed co-operative bank. Apart from stints in the corporate world, Abhijit has served on the Academic Council and Board of Governors of The Institute of Chartered Financial Analysts of India. Abhijit has also been very active socially.

Accounting Shenanigans:

Accounting Shenanigans Show a financial position better than reality Over-statement of reserves providing a false idea about financial strength Suppressing third party liabilities or overstating assets Providing a false idea about sustainability of earnings

Manipulation technique 1: Postpone recording costs:

Manipulation technique 1: Postpone recording costs Implications Report higher profits Report higher reserves Report lower third party liabilities

Manipulation technique 2: Treat Costs as Assets:

Manipulation technique 2: Treat Costs as Assets Implications Report higher profits Report higher reserves Report higher assets

Manipulation technique 3: Suppress fall in value of assets:

Manipulation technique 3: Suppress fall in value of assets Implications Under-report costs Report higher profits Report higher reserves Report higher assets

Manipulation technique 4: Over value assets, inventory:

Manipulation technique 4: Over value assets, inventory Implications Report lower costs, hence higher profits Report higher reserves Report higher assets

Manipulation technique 5: Treat inflow on account of liabilities as revenue:

Manipulation technique 5: Treat inflow on account of liabilities as revenue Implications Report higher revenue Report higher profits Report higher reserves Report lower third party liabilities

Manipulation technique 6: Defer expenses to future though not justified by value:

Manipulation technique 6: Defer expenses to future though not justified by value Implications Report lower costs Report higher profits Report higher reserves Report higher assets

Manipulation technique 7: Pass off costs arising out of abnormal events as normal:

Manipulation technique 7: Pass off costs arising out of abnormal events as normal Implications No impact on profits or reserves Non-disclosure of a material event which could provide other insights

Manipulation technique 8: Report proceeds from sale of assets as normal revenue:

Manipulation technique 8: Report proceeds from sale of assets as normal revenue Implications Report higher revenue Report higher profits Report higher reserves Report higher assets

Manipulation technique 9: Non-accrual of costs incidental to earning revenue:

Manipulation technique 9: Non-accrual of costs incidental to earning revenue Implications Report higher profits Report higher reserves Report lower liabilities

Manipulation technique 10: Recognize revenue earlier than justified:

Manipulation technique 10: Recognize revenue earlier than justified Implications Report higher revenue Report higher profits Report higher reserves

Manipulation technique 11: Under provision of potential third party claims:

Manipulation technique 11: Under provision of potential third party claims Implications Report lower costs Report higher profits Report higher reserves Report lower liabilities

Manipulation technique 12: Keeping collection book open or end of year sales holiday:

Manipulation technique 12: Keeping collection book open or end of year sales holiday Implications Report lower receivables / inventories Report lower borrowings

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