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: A corporation can have so much financial leverage that it finds it difficult to obtain additional credit. To reduce this problem a corporation may lease, rather than buy assets. This "off balance sheet financing" makes the corporation's financial position appear better to the outsider. Is this an ethical recommendation for the financial manager to make? 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.

Corporations with huge proportion of debt in their capital structure may find getting additional debt quite difficult for future expansion or for capital expenditure.

In such cases, leasing is a prudent option as it makes the balance sheet of a company lighter. This becomes specially true for some industries like capital goods, hotels etc. which have high amount of debt in their capital.

Take the case of hotel industry. Hotels now are running hotels either on lease or a management contract. They are not putting their money to buy land and then bulid a hotel as it stresses the balance sheet. The option of leasing or running a hotel on management contract is more logical and prudent as it keeps the balance sheet clean and light.

So, this is not an unethical thing to do and financial manager can opt for leasing for business operations.

(But the manager's intention must not be to fool the outsiders by leasing the assets.)

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