Certified Fraud Examiner Practice 2026 - Free Practice Questions and Study Guide

The current ratio is a financial metric that compares a company's current assets to its current liabilities, providing insight into its short-term liquidity. Liability concealment refers to practices that hide or distort the amount of current liabilities on a company's balance sheet. When liabilities are concealed, they do not accurately reflect the company's financial obligations.

When liabilities are reduced (whether intentionally or by omission), it can give the appearance of a healthier financial situation, as the current ratio would appear to improve. This practice does not necessarily mean the company has better financial health; it simply means that the liabilities are not fully disclosed. Therefore, the concealment can lead to a potentially inflated current ratio as current liabilities are understated, which may create a misleading impression of the company's liquidity.

So, the correct answer indicates that liability concealment may indeed increase the current ratio, as the effect of reducing the reported liabilities can artificially enhance this financial metric. This highlights the importance of transparency in financial reporting, as the actual liquidity position may be much weaker than what the ratio suggests when liabilities are concealed.