Financial statement manipulation, also known as earnings
management or creative accounting, involves altering financial
reports to present a distorted picture of a company's financial
health or performance. Typically, manipulation involves inflating
revenues, understating expenses, manipulating reserves or
misrepresenting assets and liabilities. In systemic cases,
manipulations serve to cover up Ponzi schemes, conceal substantive
fraud schemes from the top or mislead investors through stock price
manipulation.
Financial statement manipulation can be notoriously hard to spot
(even at systemic levels) due to a number of factors including the
following:
- Complexity: Financial statements are complex
documents that involve numerous accounting principles, estimates
and judgments. Manipulators can exploit this complexity to hide
their actions.
