GBP Monitor: More and more companies overstate their profits in financial statements

The September report of the German Business Panel (GBP) shows that financial information of companies must currently be taken with a grain of salt. It seems that companies are using their room for manoeuver more than they used to, and that they use it, in particular, to make their profits appear higher.

The economic outlook in Germany remains gloomy. The September data show that, while key business figures have improved, the probability of default has also increased. The expected probability of default has increased to 14.3 percent. In energy-intensive sectors such as the mechanical industry, the rate has increased to 16 percent and in sectors particularly affected by the coronavirus crisis event to 18.2 percent. The probability of default provides information on how likely entrepreneurs believe it is that a competitor will go out of business within the following 12 months.

Since the higher economic pressure threatens corporate goals and a company’s survival, the majority of companies uses accounting policies: Almost 85 percent of the companies say that they actively steer their results. In most cases, implementing a cost-cutting strategy to reduce consumption but also to layoff employees is the first step. However, companies are increasingly using accounting measures to artificially increase their profits. This particularly applies to large corporations.

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