Business
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Good-Looking Balance sheet
1. What do the balance sheet show?
The companys financial status at a particular time. It shows the asset (cash, accounts receivable, inventory, land, buildings, equipment, intangible items), liabilities (accounts payable, notes payable, interest payable), Stockholders equity (capital stock, retained earnings).
2. Why do managers want to show good-looking balance sheet?
Because of lenders judge businesses by the companys balance sheet, managers are easily led astray to dress up their balance sheet. The more the balance sheet looks good, the easier managers can borrow the money from bank and other invester.
Some small business managers try to minimize profits for decreasing income tax. It is another way to dress up the balance sheet.
3. How can an independent auditor decreases such behaviors of managers?
The independent auditor should be especially aware of the potential for dressing up the balance sheet and watch carefully those balance sheet.
The auditor can advise managers about bad effect of window dressing because window dressing just have the company looks good for a short period. Time will tell. In the future, managers will not be able to deceive bank and other invester anymore.
Also, the auditor uses the way of peer review. It means at least more than 2 independent accounting company works together for one company. For eaxmple, one accounting firm audits the company and makes the financial statement, another accounting firm check that financial statement. It works same effect as double-checking the balance sheet and prevent managers from temtation of dressing up the balance sheet.