2.5: Financial Reporting Issues Flashcards
What is the main objective of financial reporting?
The main objective of financial reporting is to provide reliable, decision-relevant information to users, helping them make well-informed capital allocation decisions.
How is accounting influenced by its environment?
Accounting is influenced by its environment, including pressures from self-interest, company interests, and other stakeholders.
Bias can arise, which may lead to wealth and value destruction.
What is a principles-based approach to financial reporting?
The principles-based approach, used by IFRS and ASPE, relies on foundational accounting principles.
It offers flexibility but requires consistency with GAAP and professional judgment to ensure neutrality.
What are the criticisms of the principles-based approach?
The principles-based approach can be criticized for being too flexible and lacking comparability, as it allows for significant judgment in applying accounting principles.
What is financial engineering?
Financial engineering involves structuring business arrangements or transactions to meet financial reporting objectives, often by creating complex legal arrangements to align accounting results with GAAP.
What are structured financings?
Structured financings refer to complex financial arrangements designed to meet specific financial reporting goals, sometimes criticized for leading to fraudulent financial reporting practices.
What pressures can lead to fraudulent financial reporting?
Fraudulent reporting can arise from pressures in the business environment (e.g., declining revenue), strategy and governance issues, and other pressures like bonuses or budget targets.
What internal controls can help prevent fraudulent financial reporting?
Strong internal controls, including vigilant management, an independent audit committee, and an internal audit function, are key to preventing fraudulent reporting.
