Doing God's Work?

This case highlights the weaknesses of the accrual basis of accounting which provides the theoretical foundations for both the U.S. Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS), in light of recent revelations by several high profile instances of fraudulent financial reporting. While accounting theory is often addressed in an accounting doctoral seminar limited to some high priests only, the implications of accrual-deferral accounting are much more profound and beguiling. It projects an aura of objectivity and scientific precision in measurement that are sorely missing in modern accounting practice. Fortunately or perhaps not so fortunately most people (99%) do not understand the degrees of managerial discretion allowed by both the GAAP and the IFRS in preparing financial statements. While the proponents of the the very strong form of efficient market hypothesis (EMH) contend that an efficient market can see through and peep through any potential foul play managers, individual investors are well advised to look at these financial statements with an appropriate degree of skepticism. Financial statements are not prepared for the man on the Clapham omnibus to take a pleasure reading ride. It is an artful handicraft of the accountants, by the accountants, and for the accountants to interpret only! Naive investors might be up for surprises if they are in a self-help mode.