Detecting Accounting Fraud Before It's Too Late

CHAPTER 5Legal Accounting Manipulations

The loopholes and the flexibility of the accounting standards allow for a wide variety of financial results.

—James A. Largay (about the lessons from the Enron case)

5.1 ALTERNATIVES, ESTIMATIONS, AND LEGAL GAPS

We have previously talked about legal accounting manipulation. It is a posting that, although it doesn't infringe the accounting standards, is done so the accounts show the image that those who prepare the accounts are interested in, instead of being done objectively. In some cases it can be a fraud of law, since, although the rules are being applied, there are practices that pursue goals that are against what is intended by the accounting standards.

If there are legal manipulations it is, basically, due to the regulations' flexibility. This explains why some companies manipulate their accounts relying on the accounting standards. It is an international problem because no country escapes from the excessive flexibility of the accounting standards.

A study published by CFO magazine in 1998 established that 78% of financial directors stated having received instructions to use the accounting standards to get the accounts to offer a better image; 38% admitted following these instructions.

Next, we review the main aspects that make the accounting standards have a wide margin of flexibility.

Transactions That Can Be Accounted for by Choosing Among Several Alternatives

In the accounting standards there are many transactions that can ...