Secret reserve

A secret reserve is the amount by which the assets of an organization are understated or its liabilities are overstated. An entity might establish a secret reserve for competitive reasons, to hide from other businesses that it is in a better financial position than appears in its financial statements. However, a secret reserve means that the information provided to shareholders is false and misleading.

There are several ways to establish a secret reserve, such as accelerating the depreciation of fixed assets, writing off assets entirely, undervaluing the market value of assets and by creating excessively large reserves for various liabilities or asset write-downs.