When a company is struggling, it is tempting to manipulate the financial statements to make things look better. Even when things are going well, management may want or need the company to look even better than it already does. Banks, investors, and other interested parties are looking at the financial statements and making important decisions about the company.
Enhancing the balance sheet is a common financial statement fraud scheme, and asset overstatement is one part of it. Increased assets make financial ratios look better and generally make a company look stronger and more attractive. What are some of the most common methods used to inflate assets?
Improper valuation of investments can fraudulently inflate a company’s assets. The risk generally lies in classifying the investments correctly. They can be classified as trading, held to maturity, or available for sale. Each of these classifications requires a different value to be shown on the balance sheet. Management may be unwilling to record a write-down for unrealized losses, and may therefore try to misclassify an investment to avoid that. The classification may also change if management is interested in recording a gain.