Certified Fraud Examiner Practice

Liability concealment is a practice in which a company hides or misrepresents its current liabilities, which can lead to an inflated perception of financial health. The current ratio, calculated as current assets divided by current liabilities, is a key indicator of a company's liquidity and short-term financial stability.

When liabilities are concealed, it means that the denominator of the current ratio (current liabilities) is effectively reduced for the purposes of analysis, which can lead to a distorted view of the company’s ability to cover its short-term obligations.

While liability concealment does not necessarily guarantee that the current ratio will increase, it can lead to scenarios where the current ratio appears more favorable simply because the liabilities are not accurately reflected. This creates the possibility that the current ratio might be higher than it should be because the hidden liabilities are not taken into account. Therefore, although the concealment may or may not lead to a definitive increase in the current ratio, it generally creates an impression of improved liquidity, hence the assertion that it "may increase the current ratio" aspects of financial statements during the concealment period.

In other choices, simply reducing current liabilities (as stated in one option) or increasing current assets (in another) do not capture the nuanced implications of conceal