BUSINESS RISKS ASSOCIATED WITH AGGRESSIVE INTERPRETATION OF ACCOUNTING GUIDELINES.

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Title:	BUSINESS RISKS ASSOCIATED WITH AGGRESSIVE INTERPRETATION OF ACCOUNTING GUIDELINES.
Authors:	Thomsett, Michael C.¹
Source:	Review of Management Innovation & Creativity. Fall2011, Vol. 4 Issue 12, p43-51. 9p.
Subjects:	Financial risk, Accounting departments, Financial statements, Audit departments, Accounting standards, Auditors
Abstract:	Purpose: This paper summarizes the methods employed in manipulating financial statements or aggressively interpreting transactions to present results in the most favorable light; and to articulate the risks associated with this practice. The identification of differences between aggressive accounting and outright fraud is not an easy matter. Methodologies outside of GAAP present a complex challenge to the determination of the ethical level of reporting; audit shortcomings after Sarbanes-Oxley continue to present a challenge including possible conflicts of interest among auditing firms. Design/Methodology/Approach: The qualitative approach is used in this paper. Author has an extensive business background and has worked in corporate accounting departments in several organizations as well as operating his own accounting and tax consultation business for four years. He presents the issues in this paper with this background in mind, and discusses problems and solutions from a financial point of view. The qualitative approach makes sense when the problems are easily articulated, even though possible solutions may not be. The paper's conclusions are the result of the research undertaken. Findings and Hypothesis: The practice of aggressively interpreting financial results is a legitimate and legal practice, and has been recognized as such. However, when aggressive interpretation goes too far, it leads to fraud at the far extreme. The hypothesis to this study is that identification of these differences is not easy except when fraud is glaring, intentional and obvious. This is rare; it is more likely that aggressive practices grow in small increments and that decisions are made by accountants under internal pressure. This pressure may be as high-level as a desire to meet analysts' estimates or uphold the stock price. It may be as mundane as to meet budgetary and forecasting goals in a current period. The practice is not simple or identifiable on one side of the law or the other. Research Limitations/Implications: Author has a financial background and has researched risks on many levels, including the risks inherent in vague or contradictory accounting standards or in the complexity and contradiction found within GAAP guidelines. Author is an expert on accounting standards and, to the extent this background is applied within a risk management environment, author is qualified to compile and express opinions on these issues. The professional involved with risk issues in an accounting structure may find this compilation valuable because author's background is of an accounting and financial nature. Conclusions: Accountants and auditors may make unwise decisions involving recognition or even the nature of accounting transactions. To a degree, aggressive accounting is recognized as a legitimate and legal practice. However, it is difficult for accountants to recognize the line between aggressive accounting and manipulation. For this reason, audit standards should be made truly independent, and clarified so that outside auditors do not face the same uncertainty in these issues as are faced by internal auditors, accountants and financial managers. [ABSTRACT FROM AUTHOR]
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Database:	Engineering Source

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Abstract:	Purpose: This paper summarizes the methods employed in manipulating financial statements or aggressively interpreting transactions to present results in the most favorable light; and to articulate the risks associated with this practice. The identification of differences between aggressive accounting and outright fraud is not an easy matter. Methodologies outside of GAAP present a complex challenge to the determination of the ethical level of reporting; audit shortcomings after Sarbanes-Oxley continue to present a challenge including possible conflicts of interest among auditing firms. Design/Methodology/Approach: The qualitative approach is used in this paper. Author has an extensive business background and has worked in corporate accounting departments in several organizations as well as operating his own accounting and tax consultation business for four years. He presents the issues in this paper with this background in mind, and discusses problems and solutions from a financial point of view. The qualitative approach makes sense when the problems are easily articulated, even though possible solutions may not be. The paper's conclusions are the result of the research undertaken. Findings and Hypothesis: The practice of aggressively interpreting financial results is a legitimate and legal practice, and has been recognized as such. However, when aggressive interpretation goes too far, it leads to fraud at the far extreme. The hypothesis to this study is that identification of these differences is not easy except when fraud is glaring, intentional and obvious. This is rare; it is more likely that aggressive practices grow in small increments and that decisions are made by accountants under internal pressure. This pressure may be as high-level as a desire to meet analysts' estimates or uphold the stock price. It may be as mundane as to meet budgetary and forecasting goals in a current period. The practice is not simple or identifiable on one side of the law or the other. Research Limitations/Implications: Author has a financial background and has researched risks on many levels, including the risks inherent in vague or contradictory accounting standards or in the complexity and contradiction found within GAAP guidelines. Author is an expert on accounting standards and, to the extent this background is applied within a risk management environment, author is qualified to compile and express opinions on these issues. The professional involved with risk issues in an accounting structure may find this compilation valuable because author's background is of an accounting and financial nature. Conclusions: Accountants and auditors may make unwise decisions involving recognition or even the nature of accounting transactions. To a degree, aggressive accounting is recognized as a legitimate and legal practice. However, it is difficult for accountants to recognize the line between aggressive accounting and manipulation. For this reason, audit standards should be made truly independent, and clarified so that outside auditors do not face the same uncertainty in these issues as are faced by internal auditors, accountants and financial managers. [ABSTRACT FROM AUTHOR]
ISSN:	19346727