Question

Do you believe that the management of a public company (i.e. listed firm on a stock exchange) is able to manage the firm’s earnings and overstate its financial performance through the change of accounting estimates related to the depreciation policy? Explain your answer and provide examples of a hypothetical and/or a real firm that engaged in such accounting practices. Please also provide a brief discussion of the reasons that may explain the behavior and the accounting choices of the firm’s top management in the above described context. (Word Limit 500 words)

Answer 1

Depreciation expense and net income are both net income line items. An understatement of depreciation causes retained earnings to be overstated. But Govt now a days strict the rules to find out the frauds. But quarterly filing of financial made little tough to the fraudsters. As per rule any change in policy needs to be mentioned in the notes to accounts of the financials. In this point  that can be helpful to the government to find out whether companies are following the rules formed.

In many cases top management overstated the income and made so much of investment. Like in case of Satyam software case in india.

Top management and Shareholders use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis. Prospective Investors need Financial Statements to assess the viability of investing in a company.