Elevating Financial Reporting Beyond a Mere Compliance Instrument*

We highlight how complying with detailed professional accounting rules can lead to lies and undermine the overall objectives of financial reporting. We do so by conducting a retrospective analysis (using the argumentation concepts of premise, qualifier, data, and conclusions) of the reasoning of the two expert accounting witnesses in the criminal trial in 2006 of Enron's president (Lay) and CEO (Skilling). We make two recommendations that are intended to elevate financial reporting beyond a mere compliance instrument and to help it conform better with the idea of fair presentation. First, we call for the objectives of financial reporting to be installed as the overarching premise in a conceptual framework (CF) for GAAP-based financial reporting. The remainder of the CF should provide essential guidance to meet those objectives. Second, we recommend that the needs of users of financial reports should be prioritized by developing ethical forecasting principles and better ways of assessing and reporting the accounting estimation uncertainties that are identified in the IASB's (2018) revised CF. We contend that a CF with the more detailed standards should guide professional judgment on the concept of accounting risk and provide guidance on an acceptable level of this risk for various line items on the financial statements. Ideally, accounting risk should be less than 0.50 so that the probability that the reported number is materially accurate is at least 0.50. This requirement is necessary for the various types of accounting estimates to be sufficiently truthful for ethical financial reporting. This will render GAAP and financial reporting more reliant on cogent reasoning and argumentation.