Inflating Earnings is More than Just Questionable – It’s Illegal
If you’re an average employee in a business environment, you probably know that being involved in fraudulent securities transactions can get you in big trouble. And if you’re the proprietor of a business or are making investments yourself, you likely know that your securities transactions and financial records are being scrutinized, particularly as recent public pressure to crack down on white-collar crime and fraud continues to grow. But depending on your distance from the deals, figuring out what constitutes securities fraud can be difficult.
Inflating earnings is one of the most common methods of committing securities fraud. While not directly related to the buying and selling of securities, inflating earnings constitutes securities fraud as they misrepresent financial prospects to investors and artificially manipulate the market. Depending on the setup, the specifics of the plans, and the victims of the schemes, these practices would be further categorized as accounting fraud, corporate fraud, or corporate misconduct.
Padding the numbers, even a little, is not a harmless way to keep stock prices high or entice new investors. It deceives stockholders in a manner that’s not just questionable or immoral; it’s illegal. Manipulation or inflation of earnings induces investments that are made on the basis of false or exaggerated information, and puts unsophisticated or vulnerable investors at risk. It also manipulates the market for investment products and invites the type of risky financial behavior that contributes to crashes or unpredictable drops in pricing or value of specific investment products.
Common methods of inflating earnings include schemes like hiding or delaying reports of customers returns (in the case of selling goods), for instance, logging customer returns in a different financial quarter than the one in which they actually took place in order to artificially lift profits. Other ways of committing securities fraud through inflating earnings by recording sales that never happened, fudging inventory records to make it appear as though more products had been sold than actually were (because some businesses track profit through inventory records), or misreporting expenses.
Regardless of how the earnings are inflated, the goal is to make overall profits appear higher than they actually are. This is intended to stimulate the stock price with the favorable news, and therefore to draw in more investment of capital. In particular, these types of schemes prey disproportionately on investors who are not savvy enough to recognize misrepresented or misleading information.
If you have been the victim of securities fraud through misreported financials, misleading company reports, or false information regarding revenue, earnings, expenses, or profits, consider seeking legal advice. It may be possible to recover all or part of your losses. You can contact an experienced investment and financial attorney at Carlson & Associates, P.A. in Miami at 1-305-372-9700 today for a consultation.