In financial statement manipulation, is understating liabilities common?

Understating liabilities is indeed a common practice in financial statement manipulation. Companies may choose to do this to present a more favorable financial position to investors, creditors, and other stakeholders. By understating liabilities, a company can show improved financial ratios, such as a higher equity-to-debt ratio or a lower debt-to-equity ratio, which might mislead stakeholders into thinking the company is less leveraged or has a stronger financial health than it actually does.

Additionally, this manipulation can result in enhanced market perceptions and improved stock prices, as stakeholders may react positively to what they believe is strong financial performance. This tactic is primarily motivated by the desire to create a more attractive financial position, which can benefit executives or owners, especially if their compensation or bonuses are tied to those financial metrics.

It's important to note that while understating liabilities can provide short-term benefits, it can also lead to severe long-term consequences including legal penalties, loss of reputation, and eventual financial distress once the true financial condition is revealed.