ifrs

IFRS and Fraud: More Challenges, More Risks

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AICPA Corporate Financie Insider Newsletter
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.

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One Accountant’s Argument Against IFRS

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Al Rosen, a forensic accountant and principal of Rosen & Associates in Toronto wrote about his opinion on IFRS (International Financial Reporting Standards) in Canadian Business magazine.

The U.S. might be moving from GAAP (Generally Accepted Accounting Principles) to IFRS, although there isn’t hasn’t been a final decision or a timeline for doing so. The problems that Rosen cites probably apply equally to the U.S. Under GAAP reporting, the system developed and used in the U.S., changes can be made to the rules based upon business conditions here and abuses of the rules.

If we move to an international standard, we end up losing control and playing by an international standard for which control is far removed from U.S. regulators. Here’s what Rosen had to say (bold added by me):

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The IFRS Impact on Accounting Education in the U.S.

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A fellow AOL blogger, Victoria Erhart, wrote a fantastic piece on Bloggingstocks,
GAAP vs. IFRS: New accounting rules could mean trouble.She looks at the problems that will surely come up if the U.S. switches to International Financial Reporting Standards (IFRS).

Currently, U.S. accounting programs teach Generally Accepted Accounting Principles (GAAP) because that’s what’s used in the U.S. And the CPA exam tests accountants on GAAP, again because that’s what’s used.

But if American companies switch to IFRS, there’s going to be a problem. Who will teach IFRS? The move to IFRS makes sense simply because of the global nature of the modern business world. Victoria says:

Read moreThe IFRS Impact on Accounting Education in the U.S.