Financial reporting is made with many estimates and judgments. For example, for the purpose of estimation of depreciation or bad debts, a firm has to decide upon the useful life of an asset. The more subjective estimates a firm adopts, the more doors it opens up for possible manipulations.
For instance, a company can overestimate its earnings by undervaluing the cost of depreciation or even aggressive and optimistic valuations of sales that are expected to occur in the future. Therefore, investors and analysts should be wary of companies whose earnings seem to have surpassed expectations through huge and unexplained estimates entered into areas they cannot verify.