Written by Tracy Coenen, CPA, CFF
AICPA Corporate Finance Insider Newsletter
Reasonable accountants can disagree about whether a move to International Financial Reporting Standards (IFRS) will improve financial reporting. One key concern is that principles-based financial statements are much more susceptible to fraud. Rather than relying on strict rules, management’s judgment will guide much of the reporting. Clearly this creates a risk of fraud, but how big is the risk?If we look at companies engaged in financial statement fraud under Generally Accepted Accounting Principles (GAAP) reporting, we often see that the abuse happens in accounts that require judgment in establishing balances. For example, reserve accounts require management to estimate the cost and timing of expenses. Sometimes firms intentionally understate the reserves to boost net income, thereby easily abusing these accounts. Other times, reserves can be overstated to create a cookie jar through which future losses can be concealed.