What Are Secret Reserves? How Secrete Reserve Is Created?


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A secrete reserve is a reserve that is created but not stated in a balance sheet. There are various ways of creating secrete reserves. The banks insurance companies and other financial institutions wants to win public confidence for there successful working. These business concerns can create secret reserves. It is a technique to show poor financial position to reveals and in case of need such reserves are available to meet crisis.
There are merits and demerits of such reserves. The auditor can examine the existence of such a situation. The amount may not be high.

The direct intensions may be good. The auditor may not disclose such reserves in the audit report. The management can create such secrete reserves by under valuation of fixed assets. In fact the value of fixed assets is much higher but it is stated at less value. The management may decide to eliminate the fix assets. The value of fixed assets can be used to create secrete reserve of the same amount.

The current assets may be recorded in the balance sheet at less value. In this way under valuation of current assets helps the management to conceal profits and resaves from liabilities.

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