Earnings Manipulation credit, better, question, states, understand

rosewhite

Hi guys,

just a quick question, in qbank there is a question where it states in the answer that one of the reasons for manipulating earnings would be to negotiate better terms on a line of credit.

I think I understand the reasoning but I'd like to hear your guys thoughts on it.

Thanks

JRossSter

Simple this way. Better earnings = better chances that the borrower will pay back and the higher the chances of repayment by the borrower, the better bargining power he has to negotiate better credit terms (lower interest rate).

Hope this helps

chetan86

to add, generally to negotiate better terms with lending, a company has to meet certain covenants which include maintaining ratios below or above a certain threshold, this obviously gives management incentive to fudge numbers.



Edited 1 time(s). Last edit at Tuesday, September 22, 2009 at 10:18AM by I_Passed_Level_1.

mnieman

sorry guys i forgot to mention that the question suggested manipulating earnings lower would be better for renegotiating credit terms. I agree with your points though as thats how I initially answered the question

ishfaque

any thoughts given this extra info?

Finalnub

Lender doesn't want borrower to default and borrower appears to be in distress via lower earnings. So the borrower will say to the lender "hey cut me some slack here because im in trouble and not making as much as i use to."

Kind of like cheating on your taxes lol

kmf229

On seeing your lower earnings, lender will prefer to earn lower payments rather than letting ur company go bankrupt which the former might or might not recover the full payments?

lc26mizzou

revenant Wrote:
-------------------------------------------------------
> On seeing your lower earnings, lender will prefer
> to earn lower payments rather than letting ur
> company go bankrupt which the former might or
> might not recover the full payments?

+1

By manipulating your earnings lower to show you are a stress company, your intention may be to renegotiate better terms on your existing debt. But for getting new credit, decreasing earnings would get your credit ratings lower and hence increasing cost of your new debt.

kd26gioi

What does "+1" means in this forum?

manasib

+1 means agreement with what is quoted above it.