For me, it is possible to build up secret reserves. A secret reserve means that an amount which the assets are understated or the liabilities are overstated. The presence of the secret reserve is to show the actual financial position of the business is better than shown in the balance sheet. There are some reasons for creating a secret reserve in the income statement.
For example, the secret reserves make the financials of a company more strong. When the company is in the period of depression, secret reserves enable the company to maintain dividends and company’s shares will remain stable. Moreover, secret reserves play a very important role in winning the confidence of the people. Sometimes when there is no profit in the business, the secret reserves can be utilized for the declaration of bonus. It will help to increase the confidence of the people.
However, the secret reserve means that the financial information provided to shareholders is false and misleading. The creation of secret reserve is against the principle of full disclosure. It is not right to hide anything from shareholders and stakeholders. The financial statement cannot show the true and fair position of the business. Besides that, when the assets are not shown in the balance sheet, some greedy people may steal it to use for their private purpose. It will be the loss of the business.