Asset accounts are manipulated to enhance a company’s balance sheet, especially to positively impact important ratios involving assets. At higher risk of overstatement are current assets such as accounts receivable. Companies don’t always like to write down or reserve for outstanding balances that customers aren’t going to pay. Yet the accounting rules require these write-downs to be done when management is aware that an account is uncollectible.
Failing to make these write-offs in a timely fashion is financial statement fraud, plain an dsimple. But it’s often done, because it’s easy to get away with. There can be a high level of activity in the area of accounts receivable, so auditors aren’t very likely to detect manipulations in these accounts. And if the manipulations are discovered, it’s easy for management to claim that they weren’t aware that an account should be written off or they weren’t aware that it was so far overdue.
Other ways to commit financial statement fraud related to assets include: failing to write down assets with impaired values (such as goodwill or other intangible assets), filing to write down obsolete inventory, or failing to record expenses for accounts with collection problems.
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