Liquidity ratios are one of most commonly used business
ratios that are used by creditors in order to asses the ability of business to generate
cash in order to pay its debts. In case liquidity ratio is low that means organization
is having difficulty in meeting its short term liabilities/debt. This would hurt organization`s
ability to get credit. Therefore management might manipulate liquidity ratio in
order to show credit worthyness of organization. Furthermore it shows company is in good financial
health that may attract the investors.
Its easier to manipulate financial statements especiallay
liquidity ratios and it is highly unlickly that this manipulation will be detected
by creditors or investors due to relationship of client with indepdentn auditor.