Balance manipulation - Definition and systematization

Balance manipulation is to be attributed to economic offenses alongside asset damage and other misconduct (such as corruption).

Balance manipulation is not defined uniformly in the German-speaking literature. A commonly used understanding of the term is as follows: Balance sheet manipulation is a conscious or unconscious violation of the rules of accounting in the area of the balance sheet, the GuV and other reporting instruments that results in a significantly inaccurate picture of the economic circumstances of the company being presented.

There are various terms that are synonymous with accounting manipulation: e.g. balance sheet manipulation, accounting fraud, accounting scandal, annual financial statements error, accounting manipulation). It should be noted that accounting manipulation does not exclusively involve violations of the balance sheet; it also includes violations of the other components of an annual financial statement (GuV and Appendix) and is also related to actions that lead to a report on the company’s irregular financial position.

The term manipulation is characterized by the fact that the truthfulness of the information is only of secondary importance for the perpetrator and is defined (according to Brockhaus) as follows: „Influencing or directing a person, a group, or a social phenomenon (e.g., public opinion), including the distorting presentation of a matter through targeted but unintelligible control impulses or information inputs.“

Account manipulation includes both intentional and unintentional violations. In addition to the unintentional misapplication or interpretation of the principles of proper bookkeeping (GoB), the following errors frequently occur: typing errors, calculation errors, reading errors, estimation errors, transmission errors, errors due to oversight.

The intentional violations are often described as minor offenses, since the Latin term „dolus“ derives from Roman civil and criminal law and translates as „deceit, cunning, deceit, trickery, deception“.

According to h.M., not even the most insignificant, objective violation of the GoB can lead to a detriment to the information interests of the balance sheet’s addressees. The focus is on determining whether the general clause (namely, the provision of a most accurate picture of the company’s assets, finances, and earnings at the balance sheet date) as well as the knowledge and ability of a careful financial statement preparer are present. According to the Beck’sche Bilanzkommentar (to which Austrian case law also refers), there are four criteria for differentiation in the form of guidance that constitute the essential limits for the invalidity of annual financial statements. A criterion of essentiality must be assumed if at least one of the following criteria is met:

• a) Deviation of at least 10% of the annual result (or at least 5% of the pre-tax profit), as well as 0.25% of the balance sheet total
• b) Deviation of at least 5% of the balance sheet amount
• c) Deviations of at least 10% from the other individual items in the annual financial statements that are particularly important for the company (or its bodies)
• d) Exceeding limits relevant under company law (e.g., size class allocation, loss of 50% of the share capital, failure to meet the debt threshold)

The reference to the „truth“ and thus the accuracy of the reporting appears appropriate in accordance with the criminal regulations regarding balance sheet manipulation in the definition of the term, as incorrect communication by management regarding the company’s financial situation is also sanctioned.

Depending on their appropriateness, manipulation of balance sheets is systematically carried out in different ways. Common distinctions – all of which have their practical justification and relevance – are: Accountancy/bookkeeping/inventory fraud; accountancy forgery/misrepresentation as well as primary/secondary fraud.

Accounting offenses are violations of the GoB i.e.S. The GoB i.e.S. regulates the propriety of recording business transactions and the organization of accounting. Balance sheet offenses include violations of the principles of proper accounting. The principles of proper accounting regulate the accounting approach and the valuation of assets. Violations of the principles of proper inventory control are grouped under the term of inventory offenses.

Balance sheet manipulations violate the principle of balance clarity and the principle of balance continuity. In balance sheet manipulations, the annual result is not affected, but only the level of presentation is distorted.

Balance sheet manipulations must be distinguished from balance sheet fraud. These violate the principle of balance sheet truth and, therefore, the principles of accuracy and freedom of will, and affect the annual result (positively or negatively).

If balance sheet manipulation is committed as a primary offense, the primary goal of the perpetrator is to manipulate the company’s financial statements. If balance sheet manipulation is committed as a secondary offense, the perpetrator primarily pursues the goal of preparing for or concealing a secondary offense (such as fraud or tax evasion) through balance sheet manipulation.

According to current studies, balance sheet manipulation occurs in the majority of cases (identified in final or operational audits or as part of criminal proceedings) that constitute balance sheet crimes, which are committed in the form of balance sheet fraud to conceal subsequent crimes.

Image: © Eisenhans - Fotolia