Manipulation of profit by misinterpretation of accounting policy

Manipulation of accounting profit by misinterpretation of accounting policy is possible in may ways. The management is in a position to interpret the policy to achieve the desired objective. this is limitation of accounting policies that these have vast scope of interpretation.

The very famous example of misinterpretation of accounting policy is the definition of capital expenditure the management can easily shift a repair expenditure to a capital expenditure by interpreting the accounting policy in a way that support the capitalization of repair expenditure.

The other important example to charge the revenue recognition policy. The management may misrepresent the accounting policy and charge the next year revenue in the current year. for example a telecom company has sold the pre paid card which is still to be utilized and the company charge the whole amount of sale as revenue on the bases of cash received.