Accounting statements can be manipulated. Please try to give an argument pro and

Question

Accounting statements can be manipulated. Please try to give an argument pro and con on this ethical issue. Any actual public examples you would like to cite would be most appreciated by all. Scenario: The financial manager is worried that the current ratio indication of short-term liquidity is so bad that it will be difficult to obtain additional funding. Therefore, the financial manager takes out a $100 million loan payable in a year and day and places the funds in cash. This improves the cash position significantly (since the cash is short-term and the loan is long-term) and creates an excellent current ratio. The day after the fiscal year ends, the financial manager repays the loan with the cash and returns to business as usual. Is it ethical to “massage” your numbers to present the corporation in the best possible light? Explain.

Explanation / Answer

Yes it is true that Accounting statements can be manipulated and window dressing can mislead the investors and stakeholders. Numersour examples like Enron , Worldcom frauds that came to light consists of manipulated accounting statements by revenue inflating or bu deferring expense as capital expenditure , by managing provisions and accruals and off Balance Sheet Adjustments.

Here the ethical issue is about managing Current Ratio by artificially inflating year end cash balance.

This is definitely unethical onthe part of Finance Manager as the inflated Current Ratio in the financial statement will mislead the creditors and investors regardinh the liquidity of the business. Unless any person goes into details of cash flow statement , it will be difficult to understand how this ratio has been managed.

As the duty and obligation of the compnay is to publish true and fair financial statement without any misstatement , it is highly unethical to manage the nos in such a way that does not reflect the reality.

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