Discuss how a company can use intercompany transactions to manipulate
Intercompany transactions are used by companies for a variety of reasons and can be manipulated to manipulate corporate earnings. These transactions involve transferring funds, assets or services between two or more entities within the same organization. This can include items such as buying from one subsidiary and selling to another, inter-branch transfers of cash, or accounting treatments such as setting up accounts receivable and payable between divisions.
By utilizing these types of transactions, companies have the potential to misrepresent their financial performance in order to show higher profits than actually exist. For example, if an entity moves funds from one part of their business to another via an intercompany transaction that is not properly recorded on financial statements this could lead to inflated figures when it comes time for reporting earnings. Furthermore, overstating sales through related party transactions while understating expenses can also provide false impressions about the company’s performance when it comes time for investors or shareholders reviewing the results.
In conclusion, intercompany transactions are often legitimate but they do carry with them the potential risk that they can be utilized in unethical ways in order to manipulate corporate earnings if not monitored closely enough. Therefore all parties involved should remain vigilant when it comes time for reporting this type of activity so that any discrepancies cannot go unnoticed and appropriate steps taken at once if irregularities arise.