Year-End Financial Statements: The Truth or Just a Well-Told Story? 

Here we are again. The year 2025 is behind us, and we have stepped into 2026. In the coming weeks, one of the busiest and most critical periods of the year will begin for companies: year-end closings. The financial scorecard of 2025 will be finalized. Income statements and balance sheets will be prepared and presented to investors, management, and banks. 

Yet this period is far more than a technical exercise of adding and subtracting numbers. It is a critical phase where performance pressure peaks, expectations intensify, and the risk of making “fine adjustments” to financial statements reaches its highest level. 

Why Are Year-End Closings Riskier? 

A significant portion of financial statement irregularities emerge precisely during year-end closings. The reason is simple: Pressure. 

Year-end means bonuses, sales targets, profit expectations, and bank covenants are all on the table. Phrases such as “We cannot close the year with a loss,” “We cannot show these numbers to investors or banks,” or “We cannot jeopardize the next funding round” are heard more frequently in management meetings. 

When this organizational pressure is combined with personal concerns — promotion expectations, bonus hopes, or fear of job loss — the dynamics change entirely. And time is always limited. The closing must be completed, auditors are waiting… 

In this hectic environment, a line-item adjustment that begins as an innocent “correction” can easily turn into a deliberate manipulation. 

Most Common Manipulation Techniques 

At year-end, there are several high-risk areas that deserve particular attention. 

The Classic but Timeless Method: Manipulating Revenue

This is the most well-known — and still the most commonly used — financial statement fraud technique. Especially in sales-driven industries, those “miraculous” last-minute sales at year-end should always raise suspicion. 

• Issuing invoices for goods that have not yet been shipped 
• Recording next year’s revenue in the current period 
• Creating fictitious sales through fake invoices 
• Recognizing revenue at full value for products that will be returned or heavily discounted in the following period

Making Expenses Invisible

Another way to inflate profits is to conceal expenses. 

• Capitalizing expenditures that should be recorded as expenses 
• “Forgetting” to recognize provisions for lawsuits, warranties, or penalties 
• Avoiding impairment or allowance for doubtful receivables by saying “let’s wait a bit longer” 
• Understating accrued bonuses or severance liabilities 

 The Silent Danger: Inventory

For manufacturing and trading companies, inventory is the lifeblood of operations — and one of the easiest accounts to manipulate while being among the hardest to detect. 

• Overstating the value of obsolete, damaged, or slow-moving inventory 
• Manipulating inventory costs 
• Conducting manipulated physical counts 
• Concealing shrinkage, losses, or scrap 
• Shifting costs between different products

Related-Party Transactions

At year-end, related-party transactions often appear formally compliant but lack commercial substance. 

• Temporary sales to related companies 
• Transactions without genuine economic purpose 
• “Cosmetic” adjustments of intercompany receivables and payables 
• Transactions reversed shortly after closing 

Stretching Judgments and Estimates

Not every manipulation involves fake documents. Sometimes overly “optimistic” management assumptions are enough. Departing from reality when valuing assets, forecasting the future, or reporting uncertainties can also constitute financial manipulation. 

So, What Can Be Done to Mitigate These Risks? 

With the right perspective, these risks can be significantly reduced. 

Look beyond the numbers and focus on the story behind them. 

Year-end closing is not solely an accounting exercise. Question management’s critical assumptions, scrutinize material last-minute transactions, and understand why results differ so sharply from prior years. 

Do not ignore pressure — manage it. 

Everyone is aware of performance pressure, yet few are willing to acknowledge it as a risk. That is the real mistake. Openly discuss how incentive schemes and targets may create opportunities for misconduct, and take preventive action.

Focus your energy where it matters most. 

It is impossible to examine every account in equal depth. Concentrate on high-risk areas such as revenue, provisions, inventory, intercompany transactions, and management estimates. 

Everything begins and ends with culture. 

The strongest control mechanism is the human factor. If you hear phrases like “just this once,” “everyone does it,” or “the auditor won’t notice anyway,” that is your biggest red flag. Without clearly defined ethical boundaries and a zero-tolerance stance, even the most sophisticated control systems will fail. 

Final Thoughts 

Year-end closings capture a snapshot of a company’s financial position. But whether that snapshot reflects reality or merely the story management wants to tell is what truly matters. 

Financial statement fraud rarely begins with major scandals. It usually starts with small compromises, often justified by saying “just this year.” 

As we enter 2026, perhaps the most important question to ask is this: 

Do these financial statements truly tell the company’s story or only the story it wants to tell?