Question

If a contingent liability is only a possible liability, why might not disclosing contingent liabilities constitute financial statement fraud?

a) Contingent liabilities are never disclosed
b) To maintain confidentiality
c) To hide potential obligations
d) To adhere to disclosure regulations

Answer 1

Not disclosing contingent liabilities can constitute financial statement fraud and mislead investors about a company's financial health. While there may be reasons for non-disclosure such as confidentiality, it is important for companies to adhere to disclosure regulations for transparent and accurate reporting.

Step-by-step explanation:

Not disclosing contingent liabilities can constitute financial statement fraud because it can hide potential obligations from investors and stakeholders, leading to false perceptions about a company's financial health. While contingent liabilities are not certain to occur, they are still significant enough to warrant disclosure and consideration in financial reporting.

Companies may choose not to disclose contingent liabilities to maintain confidentiality, but this can be problematic as it can mislead investors and create an inaccurate picture of the company's financial position. Additionally, non-disclosure may result in penalties from regulatory bodies for non-compliance with disclosure regulations.

Therefore, it is important for companies to disclose contingent liabilities in their financial statements to provide transparent and accurate information to investors and stakeholders.