Unformatted text preview: Investors want decreased risk and high returns.
Risk is reduced when variability of earnings is decreased.
Rewards are increased when income continuously improves.
Firm A © 2003, 2005Which
AICPA Firm B firm will have the higher stock price? Nature of Accounting Rules
In the U.S., accounting standards are “rulesbased” instead of “principles based.”
– Allows companies and auditors to be extremely
creative when not specifically prohibited by standards.
– Examples are SPEs and other types of off-balance
sheet financing, revenue recognition approaches,
merger reserves, pension accounting, and other
– When the client pushes, without specific rules in
every situation, there is no room for the auditors to
say, “You can’t do this…because it isn’t GAAP…”
– It is impossible to make rules for every situation
© 2003, 2005 by the
AICPA Auditors—the CPAs
Failed to accept responsibility for fraud detection (SEC,
Supreme Court, public expects them to detect fraud) If
auditors aren’t the watchdogs, then who is?
Became greedy--$500,000 per year...
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