When you’re determining what types of stocks to invest in, you might turn to a company’s financial statements to help guide your decision. However, some unethical companies may manipulate their financial information, giving you a less than complete picture of a business’s fiscal health.
Companies manipulate financial statements for many reasons. Financial statement fraud may be used to perform an end-run around regulators. Sometimes, executives may manipulate statements to ensure that they qualify for certain forms of compensation. In other cases, a company may simply want to defraud investors.
Detecting fraud can be challenging
There is no agreed-upon accounting standard when it comes to financial statements. This can cause some companies to get creative with their numbers. This also makes it difficult to detect cases of fraud. A business may inflate its numbers to look stronger in a particular quarter. Conversely, a company may depress its numbers to look like it has grown in subsequent quarters.
A detailed analysis of financial statements is a must if you intend to use them to help guide your investment decisions. You will have to know various formulas and ratios to fully understand what a financial statement actually means. However, few people have this type of detailed knowledge.
A financial adviser or a broker may be able to make more sense of a financial statement. However, they can lead you down a fraudulent path as well. When you have lost a substantial amount of money because you made an investment based on a financial statement, you may have been the victim of fraud. You should discuss your legal options with a skilled professional.