What is the consequence of improper classification of component units?

The consequence of improper classification of component units is that it results in misleading financial statements. When component units are not accurately classified, the financial information presented may misrepresent the financial position and operational results of the primary government. This misclassification can distort the true picture of the financial health of the organization, leading stakeholders to draw incorrect conclusions or make poor decisions based on this inaccurate information.

Accurate classification ensures that all relevant entities that are financially accountable to the reporting entity are included in the financial statements, which directly impacts the credibility and reliability of the financial reporting process. Proper classification helps ensure that the financial statements present a true and fair view of the entity's overall financial situation, thereby enhancing the usefulness of the information for users such as investors, creditors, and other stakeholders.