Question

In liability fraud, liabilities are most often:

a) understated
b) overstated
c) recorded as assets
d) recorded as expenses

Answer 1

In liability fraud, liabilities are most often understated to make a company appear more financially stable by showing improved debt-to-equity ratios and solvency metrics.

Step-by-step explanation:

In the context of liability fraud, liabilities are most often understated. When liabilities are understated, it means that a company reports less liability on its balance sheet than actually exists. This can make the company appear healthier financially than it truly is by showing a more favorable debt-to-equity ratio or better solvency metrics. In contrast, overstating liabilities may occur in other contexts, such as attempting to reduce taxable income, but it is less common in fraud because it typically doesn't improve apparent financial performance.