Senior Management's Motives for Overstating Business Statements

A

The purpose of senior management in overstating financial statements is to present an inaccurate picture of the financial performance and position of the business. This may be done for a variety of reasons, including to meet certain financial targets, to obtain financing or other benefits, or to conceal fraud or other financial irregularities. The question is asking which of the following is NOT a reason why senior management would overstate financial statements.

A. Comply with debt covenants: One reason why senior management might overstate financial statements is to comply with debt covenants. Debt covenants are terms and conditions that lenders place on a loan to ensure that the borrower meets certain financial performance criteria. If the borrower fails to meet these criteria, the lender may have the right to call the loan, which could have serious consequences for the borrower. By overstating financial statements, senior management can make it appear that the business is meeting its debt covenants, even if it is not.

B. Meet personal performance criteria: Another reason why senior management might overstate financial statements is to meet personal performance criteria. Senior managers are often evaluated based on financial performance metrics, such as revenue growth or profitability. If they fail to meet these metrics, their job performance may be called into question or their compensation may be affected. By overstating financial statements, senior management can make it appear that the business is performing better than it actually is, which can help them meet their personal performance criteria.

C. Trigger performance-related compensation: A third reason why senior management might overstate financial statements is to trigger performance-related compensation. Many executives receive compensation packages that are tied to the financial performance of the business. By overstating financial statements, senior management can make it appear that the business is performing better than it actually is, which can trigger performance-related compensation.

D. Show a pattern of growth to support the sale of a business: The fourth reason listed is that senior management might overstate financial statements to show a pattern of growth to support the sale of a business. This can be a common tactic when a business is being sold, as buyers are often looking for businesses with a history of strong financial performance. By overstating financial statements, senior management can make it appear that the business has a history of strong financial performance, even if it does not.

Therefore, based on the options given, the correct answer would be D - Showing a pattern of growth to support the sale of a business is not a reason why senior management would overstate financial statements.