What Types Of Companies Are Most Likely To Use Accounting Gimmicks?
While it is relatively easy for managers to use accounting gimmicks and there is only a moderate chance of their getting caught, most companies DO NOT intentionally distort their financial reports. Unfortunately, since you never know in advance which companies DO publish misleading information, it is prudent to be a bit suspicious of all companies and search for early warning signs of problems. Such signs often include: • A weak control environment [i.e., lack of independent members on the board of directors or lack of competent/independent external auditors]. • Management facing extreme competitive pressure • Management known or suspected of having questionable character Be particularly alert for these factors in the following types of companies: • Fast-growth companies whose real growth is beginning to slow • Basket case companies that are struggling to survive • Newly public companies and private companies The growth of all fast-growth companies will eventually slow considerably. At
