Corporate managers use internal controls and false accounts to cover up long-term financial misconduct, often involving a series of complex and hidden means. Here are some common methods and mechanisms: ### 1. **Inflating revenue** - **Pre-recognition of revenue**: Recording unrealized or uncertain revenue in advance in the accounts to improve the current period's revenue performance. - **Fictitious sales transactions**: Fabricating non-existent sales transactions and generating false invoices and receipts to increase revenue data. - **Multi-channel sales**: Making false sales through multiple affiliates or subsidiaries to hide the true revenue situation. ### 2. **Hidden expenses and liabilities** - **Deferred expense recognition**: Delaying expenses that should be recognized in the current period to future periods to reduce current expenses and thus increase profits. - **Using related-party transactions**: Hiding the company's true debt level by transferring real liabilities to other entities through improper transactions with related parties. - **Hidden liabilities**: Not listing accounts payable or other liabilities on the balance sheet, making the financial situation look healthier than it actually is. ### 3. **Manipulation of asset valuation** - **Overestimation of asset value**: exaggerating the value of fixed assets, inventory or accounts receivable to increase total assets and shareholders' equity. - **Underestimation of depreciation and amortization**: reducing the depreciation of fixed assets and amortization expenses of intangible assets to inflate profits. ### 4. **Using special purpose entities (SPEs)** - **Transferring debt**: by setting up special purpose entities, transferring the company's debts and liabilities to these entities, thereby concealing the actual liabilities in the parent company's financial statements. - **Hidden losses**: using SPEs to cover up the company's real losses and maintain a healthy image in the financial statements. ### 5. **Deceptive accounting policies and estimates** - **Selection of favorable accounting policies**: using the choice space of accounting standards to select the accounting policies that are most favorable to the company, such as revenue recognition method, inventory valuation method, etc. - **Manipulation of accounting estimates**: for example, adjusting the amount of bad debt reserves, inventory impairment reserves, etc. to affect profit performance. ### 6. **Weakening of internal control** - **Restrictions on internal audit and monitoring**: Reduce the independence and effectiveness of the internal audit department, making manipulation difficult to detect. - **Conflict of interest**: Management adjusts the internal control process to serve personal interests rather than the overall interests of the company. ### 7. **Manipulation of information disclosure** - **Selective disclosure of information**: Disclose only information that is favorable to the company, conceal or downplay negative financial data. - **Complex financial statements**: Use complex financial statements and notes to make it difficult for external auditors and investors to identify potential financial problems. ### 8. **Manipulation of cash flow** - **Premature or delayed payment**: Adjust the cash flow statement to create a good cash flow situation by manipulating the timing of accounts receivable and accounts payable. - **False cash inflow**: Record non-existent cash inflows to increase the company's cash holdings. ### Real case reference - **Enron Scandal**: Use special purpose entities (SPEs) to hide huge debts and inflate revenues, resulting in a false healthy state of the company's financial statements. - **WorldCom**: Covered up financial difficulties by capitalizing operating expenses, reducing current expenses, and inflating profits. ### Risks and consequences Using internal controls and false accounts to engage in financial misconduct is not only illegal, but may also lead to: - **Legal sanctions**: High fines, criminal liability, or even imprisonment. - **Reputation loss**: Damage to the reputation of the company and management, leading to the loss of investors and customers. - **Financial collapse**: It may be able to cover up problems in the short term, but in the long run, real financial problems will lead to company bankruptcy or significant losses. ### Conclusion Although some managers may try to manipulate financial data through various means, the regulatory environment of modern enterprises is becoming increasingly stringent, and internal controls and external audit mechanisms are constantly improving, and the risks and costs of financial fraud are also increasing. Enterprises should adhere to honest operations and establish a sound internal control system to ensure the transparency and accuracy of financial statements.