IR Troubles With Financial Manipulation

For a recent assigned reading, we read about financial reporting and the different information that should be filed about a company. Chapter seven mentions the necessity of income statements, revenues, expenses, balance sheets and statements of cash flow in these financial descriptions. While Chapter 7 does touch on the dangers of these financial reports being incorrect, I decided to research further about how a company’s financial report could be manipulated.

An article by Tory Adkins, explained the different things investors need to be aware of when viewing the financial reports of an organization. The article states that companies frequently manipulate in order to heighten the payment of corporate executives along with the ease of manipulation due to flexibility in the GAAP standards. The other reason why companies decide to change their financial statements is because of the relationship between auditors and the client. The connection between these two groups creates a conflict of interest when the auditors assists clients in recording information that is not correct.

Companies can manipulate statements by inflating current period earnings or just the opposite action, of deflating current period earnings. Dr. Howard Schilit has discovered seven different ways in which the companies can make themselves seem more or less productive than they are. These include recording revenue prematurely, recording fictitious revenue, increasing income with one-time gains, shifting expenses to a different period, failing to record liabilities, shifting revenue to a later period, or shifting future expenses to a current period.

The different ways that companies can trick and manipulate investors is something individuals along with trained IR professionals need to focus on. As a result IR professionals must have a working knowledge of financial analysis along with the different conflict of interests between auditors and companies that could change the financial information being presented.

Corruption and false reporting within Enron, Worldcom and Tyco International should make IR specialists concerned about the fact that the information they are working with can be false. Since IR professionals are guiding investors, it is important for professionals to realize the presence of corruption within the industry and attempt to keep their investors away from these sticky situations.