Financial Statement Manipulation & Materiality

This assignment delves into the critical issue of financial statement manipulation, highlighting how organizations can be tempted to misrepresent their financial health. It emphasizes the importance of the 'materiality concept' in ensuring transparency and accuracy in financial reporting. The text explores two common approaches used for manipulation – inflating income or expenses – and illustrates the potential consequences through examples like Bernie Madoff's scheme. The assignment concludes by stressing the necessity of applying accounting principles diligently to prevent financial statement fraud.

ACCOUNTING

Executive Summary
This report summarises the topic of How financial reports can be manipulated by
managers. Concept of materiality accounting theory illustrated with practical base examples. The
framework provide debate upon material disclosure subject to financial statement of an
organisation.

Table of Contents
Executive Summary.........................................................................................................................2
INTRODUCTION ..........................................................................................................................5
MAIN BODY...................................................................................................................................5
The phenomenon from different perspectives.............................................................................5
Argument/discussion development ............................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES ...............................................................................................................................8

INTRODUCTION
Accounting is systematic process of summarizing, analyzing, interpreting and
communicating of financial information for regulators, agencies and tax collection entities. It
bring out profit and loss for a particular period, and the amount and nature of a firm's liabilities,
assets and owner's equity. Financial reports are present formal record of the position of a
business and financial activities, person or other entity. The selected topic which is selected to
continue in this report is How financial reports can be manipulated by managers and that topic
related to accounting theories of Materiality theory. This theory is the principle of financial
accounting and reporting by firms inattention trivial matters, but they have to disclose everything
for audience that would be important regarding financial reports.
This report covers the explanations of phenomenon from different perspective, different
theoretical angles from two cases of manipulation of financial statement applying by dell inc.
And Bernie madoff. In the end concluded that Materiality approaches apply by companies for
manipulation and arguments about the cases.
MAIN BODY
The phenomenon from different perspectives
One of the biggest difficulty in the world of commercial enterprise is the manipulation of
financial statements, management transfer out for intentional acts to achieve a wanted outcomes,
occasionally for their own profit(González,García-Meca2014). Companies have been known to
quite intentionally misguide to their stakeholders such as potential investors, shareholders, her
majesty's revenue and customs (HMRC), and employees. Factors that contribute to financial
statement manipulation - Firstly, in various cases the rectification of corporate administrator is
directly bound to the financial performance of the organization. In one case after investigation
getting that dell inc. has admitted that they are manipulating financial statement in order to
enhance quarterly earnings. The restatement will result in a reduction of net income by $92
million over the four year period. After examination items related to dell's deferred revenue on
software sales(Dell inc. manipulated financial statement 2018.). Second, It is probable that
financial statement manipulation will be noticed by investors due to relationship between the
corporate client and the independent auditors. The auditors could be stimulate to twist the

accounting rules to represent the financial condition of the organization in a manner that will
keep their client happy (Hadani,Goranova,Khan 2011).
There are another case of of Bernie madoff takes the investors money and shows 17th floor
employees painstakingly constructed false records, books, and statements that were sent to
investors showing wrong growth value (Bernie madoff shows wrong image 2018). There are five
fraud that are effecting to financial statement like as overvalued complex financial instruments,
understated liabilities, inflated revenue, overstated intangible assets and institutionalized
misreporting. They all are not apply accounting theory of Materiality so effected to financial
statement (Drucker 2013).
Argument/discussion development
As per the my point of view managers manipulated company's financial statement for the
reason of marketing of shares and for attracting stakeholder. To avoid the manipulations mangers
apply approaches to the company that will help to attain the shareholders' believes easily in an
organization. According to accounting theory Materiality describe that all relevant and fair
amount shows in financial statement and disclose right statement of finance because it shows
right condition of company and helping to present the accurate price of shares to shareholders.
It is relatively easy to convert corporate financial statements because the financial
accounting standard board (FASB), which fixed the GAAP standards, provides important
measure in the accounting provisions that are available to be used by business firm management.
That management has a direct bonus to paint a emphasized image of the company's financial
condition in order to meet established bolster and performance expectation for their personal
defense reaction.
For Financial statement manipulation securities and exchange commission (SEC) has
taken various steps to justify to this type of corporate misconduct, conflict of interest between the
corporate client continue and the independent auditor. The Materiality concept has meaning for
any financial statement only concerning that The statement's purpose for this audience and The
statement's intended audience.
When an independent auditor reviews a firm's statement of financial condition, the best
achievable result is an auditor's opinion of conditional. The opinion affirms the auditor's
judgment that the reports are accurate and conform to GAAP and this means the auditor finds no
Materiality issue. From my way to reduce manipulation apply these methods regarding

accounting tools such as understand of expenses, overstatement of assets, improper use of
reserves, misapplication of accounting rules, misrepresentation of information, overstatement of
revenues, understand of liabilities, mischaracterization as one time expenses. As per the above
case of Dell inc. problem is material weaknesses in dell's internal controls, and that bettering
actions in order. Part of the problem at dell is require accounts regarding accounting prospective
not justify and giving estimate balance. A small change of estimation impact on the financial
statement of dell. This case highlights just how easy for organization to head down a withering
path with it's financial statements. Accounting manipulation are meant to be a same time
property can increase into a mess that distance years and costs millions of dollars to accurate. In
another case of Bernie madoff showing wrong pictures to everyone and no one checking
constructed 17th floor and all are believing in image of construction. According to the associated
of certified fraud examiners, financial statement fraud is a scheme was applying bu employee
intentionally and cause a misstatement and omission of material information in company's
financial reports.
CONCLUSION
It is concluded that Materiality concept says that all financial information disclose in
financial statement and should be included opinion on financial statement. Apply this approach
and After that getting as a result there are two common approaches of Materiality to
manipulating financial statements – the first approach is to expand current period net income on
the income statement by unnaturally inflating income and gain or deflating current time period
expenses. This approach helps to make the financial status of the organization look improved
than it actually in order to meet established prospect. The second approach to financial statement
manipulation need the perfect opposite plan of action, which is to release current period earnings
on the income statement by inflating current period expenses depreciate revenues or depreciate
revenues. The reason for this approach may not be obvious as in the previous example because it
make financial status on organization look. From above two cases learns that in business firms
accounting theory must apply on financial statement and aware for financial information.

REFERENCES
Books And Journal
González, J.S. and García-Meca, E., 2014. Does corporate governance influence earnings
management in Latin American markets?. Journal of Business Ethics. 121(3). pp.419-
440.
Hadani, M., Goranova, M. and Khan, R., 2011. Institutional investors, shareholder activism, and
earnings management. Journal of business research. 64(12). pp.1352-1360.
Drucker, J., 2013. Performative Materiality and Theoretical Approaches to Interface. DHQ:
Digital Humanities Quarterly. 7(1).
Online
Dell inc. manipulated financial statement. 2018 . [online]. Available through:
<https://www.allbusiness.com/financial-statement-manipulation-at-dell-4968408-
1.html>
Bernie madoff shows wrong image. 2018. [online]. Available through:
<http://www.abfjournal.com/%3Fpost_type%3Darticles%26p%3D62781>