Audit and Assurance Practice Exam

Which of these is not a reason management might fraudulently overstate revenue?

1. To meet financial forecasts

2. To improve company valuation

3. To discourage investors from investing

4. To qualify for bonuses

The correct answer is: To discourage investors from investing

Management might fraudulently overstate revenue for several reasons, such as meeting financial forecasts, improving company valuation, and qualifying for bonuses. Each of these motivations is rooted in the desire to present the company in a more favorable light to stakeholders, such as investors, analysts, and employees. Meeting financial forecasts is essential for management to maintain credibility with analysts and investors. If a company consistently meets or exceeds its forecasts, it can enhance its reputation and potentially lead to a higher stock price. Improving company valuation is another significant reason, as higher reported revenues can attract more investment and result in a better valuation of the company. Likewise, qualifying for bonuses often hinges on meeting specific revenue targets, and overstating revenues can directly impact the bonus calculations that are tied to reported performance metrics. In contrast, discouraging investors from investing does not align with the typical objectives of a management team, which is generally focused on attracting and retaining investors. Fraudulently overstating revenue would not be a strategy to discourage investment; rather, it would aim to have the opposite effect, encouraging investors to buy in based on misleadingly optimistic financial performance. This motivation stands apart from the others, making it the correct answer to the question.