Question

List 5 ways companies increase their income that is not per GAAP and may be construed as fraudulent.

Answer 1

• Following are the list of ways by which compnies increase their incoe fraudulent, not as per GAAP :-

1. Disclosed the Loan Amount as Sales :- This is also a way to increase profitibility by manipulating the finacial statement to deceive the stakeholders. This is possible only when the loan amount is taken from other than any financial institutions now a days but still we found some loopholes. Lahman Brothers Scandal (2008) is also based on this scandal in which amount of $50B hidden in loan disguised as sales.
2. Increase Earning Fraudently :- This is also quite common practice of various companies to increase numbers of earning to achieve targets, meets stakeholder's expectation, improve financial performance etc. There are various scandals based ob this like Healthsouth Scandal (2003), in which earning allegedly inflated by $1.4B to meet the stakeholder's expectation.
3. Under Reporting of Cost :- This is also a way to manipulate the profitibility by under-reporting of cost or capitalised the cost not as per GAAP requirement. Worldcom Scandal (2002) is alsobased on it, in which line cost of $11B capitalised due to which assets & performance of business were highly inflated and manipulated to deceive stakeholders.
4. Improper Depreciation & Amortisation Cost :- This may also be possible by charging low depreciation and amortisation cost to increase profitibility. Ths is possible by increasing the useful life of asset to spread over the depreciation and amortisation cost in more years. Waste Management Scandal (1998) was also based on this in which depreciation of Property, Plant & Equipment was spreaded over in more years by manipulating the useful life.
5. Improper Valuation of Inventory, Share Price, Other Assets :- This is also a way to increase profitibility by wrong valuation to increase profitibility and to deceive stakeholders. American Insurance Group Scandal (2005) was also a case in which stock price was manipulated for traders.