Various manipulative techniques behind net income planning have become one of the most widespread causes of financial fraud in the context of economics. On the example of the provided case study, it may be seen that quite often, when it comes to the official accounting data, many company leaders are interested in showing the result. However, they should rather work with actual indicators in order to define new growth strategies.
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Researchers claim that there are several reasons due to which companies’ CEOs are eager to manipulate journal entries. The most notorious of them is the willingness to impress the stakeholders as well as to maintain the support of investors or business partners (Akhtar, Zia, & Shezhad, 2018). Thus, Hugh Stallings quite likely was motivated by the same purposes and decided to use a working but insecure method.
The idea of journal entries changes, in fact, easy to execute and shows results almost immediately. The major difference between “prepaid rent” and “rent expense” lies in the fact that the latter deals with expenses made during the current year while the previous entry concerns the following year’s expenses. Since the net income is the entity’s income, excluding several types of expenses, including rent and taxes, the result of the entries shift will be quite visible. Consequently, such an approach visibly increases the financial indicators of a company in the year-end, as well as potentially improves its position on the market.
When it comes to the method’s benefits, it should be mentioned that it is one of the fastest ways to increase net income. The company’s top management gains an advantage of remaining relevant on the market while the stakeholders lose the opportunity of an appropriate financial investment. Hence, the implications it may bring are rather vague. According to the researchers, nowadays, there are various verification models which are designed to define the slightest modifications in accounting reports (Chen & Yang, 2018). Thus, once a company’s financial manipulations are detected, it is at risk of being immediately abandoned by investors and other individuals somehow affected by the entity.
Akhtar, M., Zia, M. H., & Shezhad, F. (2018). True and fair view of financial reporting practices: Accountants’ perspective. Journal of Islamic Business and Management, 8(S), 301-319.
Chen, S., & Yang, A. (2018). An effective financial statements fraud detection model. DEStech Transactions on Engineering and Technology Research, 1-4.