If you look at the diagnostics section in Wemasters tools you find the section Diagnostic Summary. And in that section there is a status box that shows URLs not found.
That status box apparently shows one how Google saw the web site at one time and not how the web page actually exists on your server. It does not show reality but history as seen by Google.
But apparently it also is the current evaluation of your site by Google.
In response to a query as to why Xenu showed my site with 6 broken links and Webmaster tools over 600 broken links, “Google Employee” on the Wemaster Groups forum said
“The "not found" errors show any URL that we found during crawling and could not access. Some of these may be links on your site, but it's likely that some are from other sites that are linking to pages on your site that do not exist or have been removed. Also, if a page is removed after we have crawled it at least once, it will show up as "not found when we try to re-crawl it.”
So it appears that Google credits you with broken links in a third party site. And by extension, Google credits you with a broken link if the third party site makes a link to a page that never existed on your site.
One webmaster replied to my query
“Are broken third party links to me affecting my position and causing things like the -30 penalty to be applied?”
by charitably saying:
“It doesn't take a brain surgeon to work that one out does it? You have a page that is in the top ten results for a certain search, you remove it, hey presto you've lost the position”
Suppose your competitor sets up pages and generates hundreds of links to your domain but to never having existed pages.
It would appear that Google Employee’s response above says that you would be credited with all these broken links even though you never had these pages in your domain.
Would all these broken links cause you to be classified as a “404” site and be penalized as the webmaster said above?
Would all these broken links cause you to get a –30 penalty?
Does this give your competitors a weapon against you or you a weapon against them?