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Yes, that is possible to build up hidden amount of profit as secret reserves. But not all the companies could do that, especially JOINT STOCK COMPANY, they are prohibited to create secret reserve. Based on my research, like banking companies, insurance companies, and electricity supply companies will have clause to create. These companies are exempted from the clause of the Schedule VI to the Companies Act.

The reasons to create the hidden amount of profit is because of they need to maintain the confidence of the customers and creditors by giving the impression of stability to a properous business. And also to avoid disclosing information to competitors.

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However, the fact that Balance Sheet of business will not reveal the correct view of financial affairs due to create the secret reserves.

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