Final answer:
Senior management is most likely to understate financial performance 1) to reduce the value of an owner-managed business during a divorce settlement, as it can affect the settlement terms in favor of the reporting owner.
Step-by-step explanation:
Senior management might understate business performance in the financial statements for a few strategic reasons. The most likely reason to do so would be to reduce the value of an owner-managed business for purposes of a divorce settlement. If the reported financial performance is lower, the perceived value of the business might be asserted as less by the owner, potentially affecting the settlement terms.
Understating performance would not be a strategy to comply with loan covenants, as these typically require certain financial health indicators, and underperformance may lead to a breach of these covenants. Similarly, understating financial results is not a means to increase the value of a corporate unit, as underreporting would typically lead to a lower valuation. Lastly, underperformance would not be used to trigger performance-related compensation or earn-out payments, as these payments are usually based on meeting or exceeding performance benchmarks.