What type of financial fraud occurs when a company fails to disclose warranty costs?

Liability concealment is a type of financial fraud that occurs when a company deliberately hides or fails to disclose its financial obligations, which can include warranty costs. By not reporting these costs, the company presents a more favorable financial position than it actually holds, misleading investors and stakeholders about its liabilities. This practice can distort the true financial health of the company and impact decision-making for creditors and investors who rely on accurate financial statements.

This fraud scheme particularly highlights how a company may manipulate its financial statements to create an illusion of profitability. Warranty costs represent future obligations that will affect cash flows, and by not disclosing them, the company can enhance its profitability metrics, making its financial situation appear stronger.

In contrast, other terms such as income smoothing refer to the practice of avoiding fluctuations in earnings to present a consistent growth trajectory, which is not specifically tied to liability disclosure. Creative accounting involves the use of unconventional accounting methods to present a financial picture that may not be entirely truthful but is still framed within the boundaries of accounting principles. Expense manipulation can entail various techniques to misstate expenses, but in the context of warranty costs, liability concealment more accurately describes the act of hiding specific liabilities rather than simply manipulating expense figures in general.