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PART C: ACCOUNTING AND REPORTING SYSTEMS, CONTROLS AND COMPLIANCE 
 
276
 
QUESTION 
Reporting results
 
Try to think of reasons why someone might want to: 
(a) 
Artificially enhance the results 
(b) 
Underreport the results 
ANSWER 
(a) 
Reasons for overstating profits and/or net assets
(i) 
To ensure achievement on paper, may have to meet targets in order to secure a 
promotion, bonuses or remuneration may be linked to performance 
(ii) 
Trying to conceal another form of fraud, such as theft 
(iii) 
Need a healthy statement of financial position to convince bank to give loan finance 
(iv) 
Ailing company may be trying to entice equity investors 
(b) 
Reasons for understating profits and/or net assets 
(i) 
To facilitate a private purchase of an asset from the business at less than market value 
(ii) 
To defraud HM Revenue & Customs by reducing taxable profits or gains 
(iii) 
Trying to force the share price down so that shares can be bought below market value by 
friends or relatives
 
3.2.1 If results are overstated 
A company may 
distribute
 
too much
of its profits to shareholders.
Retained
 
profits will be lower than believed
, leading to potential shortfalls in working capital. This 
makes the day-to-day activities more difficult to perform effectively. 
Incorrect decisions will be made
, based on inaccurate knowledge of available resources. 
The effects of fraudulent activities can also affect 
stakeholders
if the financial statements on which they 
rely are misrepresentations of the truth.
(a) 
Investors
making decisions based on inaccurate information will find actual returns deviating 
from expectations. 
(b) 
Suppliers
will extend credit without knowing the financial position of the company. 
3.2.2 If results are understated 
Returns to investors may be reduced unnecessarily. 
If the company is quoted on the stock exchange, the share price might fall and market strength may be 
eroded. 
Access to loan finance may be restricted if assets are understated. 
The