Income overstatements: Income overstatement involves the artificial inflation of a company’s income figures, which is most commonly achieved through fictitious revenue recognition. A common motive for income overstatement in China is the ambition that Chinese subsidiaries have to reach the performance targets set by the overseas shareholders. Meanwhile, meeting performance targets often grants local management some performance-based remuneration they would otherwise not have been entitled to receive given the poorer performance of the business.
Income understatements: Income understatement involves the artificial deflation of a company’s income figures, which is most commonly performed by understating revenues and/or overstating expenses. A common motive for income understatement in China is corporate tax evasion.