Suppose in order to defraud the shareholders,a manager sets up an independent company that he owns and buys one of the main company's inputs of production from this company.He would be tempted to set the transfer price

Question

Quizplus · Accepted Answer

By setting the transfer price above the market price, the manager can generate a profit for his independent company and decrease the profitability of the main company, thereby defrauding the shareholders. Setting the transfer price below the market price would not benefit the manager's independent company, and setting it at the market price would not achieve the desired outcome of defrauding the shareholders. As for GAAP, setting the transfer price in accordance with GAAP may not necessarily prevent fraudulent activities.

Suppose in Order to Defraud the Shareholders,a Manager Sets Up