The report of financial position presents the lower risk with lower level of liabilities than actual. Off balance sheet financing makes a relationship among the executive pays and accounting numbers and control of the financial regulations (Thomas, 2002).This financing method has several kinds of tools such as joint ventures, operating leases, special purpose entities, Sales of receivables, partnership, securitization and derivatives.
Due to the wrong financial statements, investors are also not able to analyze, where they have to make investment (Nolop, 2012).For example, Enron is the financial institution which was collapsed due to the manipulations in their financial statements. Company does not reveal its overall income in their financial statement due to which they have to face problem. Auditors scrutinize the financial statement and identify the manipulations. After that they recalled all their statements and identified big fraud. Due to such type of manipulations, companies are making wrong use off balance sheet programs. It is necessary for the companies to make positive use of financial statements.
Abusive off balance sheet transactions are the major cause of financial crises. Through off balance sheet, companies and financial institutions want to remove the transparency from markets, investors and regulators (Rosenfield, 2006). This concept provides the facility to financial institutions to spread their securitizations, bad loans and derivatives transactions, which have indirectly affected the financial system of overall world. There are large numbers of companies which have created problem through off-balance sheet. Financial institution has built up hundreds of dollars to the exposure in mortgage market and do not disclose the assets and liabilities of balance sheets (Anderloni, Llewellyn and Schmidt, 2009).