Italian PM Matteo Renzi in Rome, Italy at the Quirinal Palace. indiPHOTOpress/Demotix. All rights reserved.Last May, Italy’s parliament passed a law that was intended to tighten the criminal sanctions for accounting fraud. A few weeks later the Court of Cassation, Italy’s highest court, ruled that the new law had in fact achieved the opposite effect. This perplexing story merits a comment, for it offers an excellent illustration of some of Italy’s main politico-economic problems.
A company can falsify its financial statements in order to show either a higher or a lower value than its fair value. A company that wishes, for example, to support the market price of its shares, obtain better financing terms, reassure banks and long-term suppliers, or avoid a recapitalisation shall inflate its value, whereas a company that wishes to evade taxes or create slush funds (from which bribes are typically drawn) shall artificially reduce its accounting value.
Whatever its purpose, accounting fraud can take one of two forms, depending on whether the falsification concerns the existence of a company’s assets or liabilities, or their valuation. If a company wishes to inflate its value, for instance, it can either include in its financial statements an asset that the company does not own, or it can include in its financial statements a knowingly inflated valuation of an asset it owns.
