Financial statement manipulation risk is arguably present for all companies' financial statements.However, the risk is elevated for companies that:
A)are heavily regulated.
B)have low amounts of debt.
C)have to make significant judgments for accounting estimates.
D)operate in stable economic environments.

Question

Quizplus · Accepted Answer

Companies that have to make significant judgments for accounting estimates (such as revenue recognition, impairment of assets, and allowance for doubtful accounts) are at an elevated risk of financial statement manipulation. Such estimates are subjective and open to interpretation, which can be exploited by management for financial reporting purposes. Companies that have low amounts of debt (choice B) are not necessarily at an elevated risk of financial statement manipulation as debt levels do not directly affect financial reporting. Similarly, operating in stable economic environments (choice D) does not necessarily lower the risk of financial statement manipulation. The risk is more related to the company's internal controls and management ethics. While heavily regulated companies (choice A) may face stricter scrutiny, this does not necessarily mean an elevated risk of financial statement manipulation, as regulations are meant to deter such practices.

Financial Statement Manipulation Risk Is Arguably Present for All Companies