Question

Absent government regulations to guard against​ fraud, why might top managers deceive investors about the true financial condition of their​ firms?Top managers might want to deceive investors about the true financial condition of their firms​ _____a. to hide liabilities that should be listed on the balance sheet to keep the firm's stock price upb. to inflate profits to enhance compensation tied to the firms profitablityc.to reduce cost of expensive external auditsd. both a and b​e. all of the above

Answer 1

Answer:

D) both a and b

• a. to hide liabilities that should be listed on the balance sheet to keep the firm's stock price up
• b. to inflate profits to enhance compensation tied to the firms profitability

Explanation:

Top management has a fiduciary duty with the corporation and its shareholders, but that doesn't mean that they will always follow their duties and even obey the law (e.g. Enron). Two of the main reasons why top management may try to deceive both regulating agencies and shareholders is to artificially keep the stock prices up, and as a result of this they will generally earn huge bonuses and other compensation tied to both the corporation's profitability and stock price.

To be honest the main reason is the second one (earn huge bonuses), but without the first one it is impossible to achieve their goal.

Answer 2

Answer:

The correct answer to why top managers might want to deceive investors about the true financial condition of their firm is option E) all of the above

Explanation:

The aim of management is to ensure that the company is profitable in order to increase its value and investment worthiness.

However, sometimes, they fall short due to internal and external factors that reduce profitability and increase liabilities. When this occur, the account books will show the unfavorable numbers. A deficit situation reflects negatively on the stock price and when shareholders are not getting a good return on their investment, they usually liquidate their shares and invest elsewhere.

To avoid that from happening, Top Managers usually hide liabilities that should be listed on the balance sheet to keep the firm's stock price up, inflate profits to enhance compensation tied to the firms profitability to reduce cost of expensive external audits.