a582 preliminary review

8/12/2019 A582 Preliminary Review

1/14

It is uncertain if adopting IFRS would encourage mfraud schemes, but using COSO based controlframework can mitigate the risk.

The adoption of IFRS brings morechallenges and risks in terms of fraud.

In reality, IFRS enhanced the neutrality andaccounting quality of financial statement inemerging and developed economies.

The overlay of IFRS and an advancedcontrol framework would mitigate the risk offraud.


2/14

Principles-based approach places greater emphainterpretation and application of principles.

Assessment of the substance oftransactions and evaluation of whether theaccounting presentation reflects theeconomic reality is needed.

This requires management to use judgmentin presenting financial statements, whichbecome a human element risk factor

leading to a higher risk of financialstatement fraud and misstatement.

Greater use of fair value as a measurementbasis placing emphasis on obtainingreliable measurements.

Cancino, F. (2009, December 7). Managing the Risk of Fraud in the Conversion to IFRS. Retrieved from

http://southfloridaacfe.org/downloads/December_7_2009_Fraud_Symposium/managing_risk_of_fraud_in_ifrs.pdf


3/14

Accountants must be on the lookout for schemesadvantage of timing differences.

The relative speed for companies toconvert to IFRS can impact the qualityof financial information. There is a riskof insufficient staffing, lack ofoversight and inadequate training.

Accounting and auditing personnelmay be lack of IFRS experience. This

slows down the process and affectsthe accuracy as well as reliability ofthe financial data.

Under IFRS, companies may be ableto recognize revenue faster, minimizeor delay mark-downs of assets.

Coenan, T. (2011, November 3). IFRS and Fraud: More Challenges, More Risks. Retrieved from

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2011/CorpFin/IFRSandFraudMoreChallengesMoreRisks.jsp


4/14

Management will have to take a judgment-based on key differences between U.S. GAAP and IFRS

Timing and proportion of revenueand expense recognition.

Selection of asset impairmenttesting models that affect thetiming of non-financial assetimpairment.

Development of fair marketvaluation of financial assets asopposed to recorded cost.


5/14


6/14

Increased subjectivity of accounting estimates couldecrease the transparency and comparability of repaccounting numbers.

Unscrupulous preparers of the

financial statements may over orunderstate asset values for their ownpurpose.

Appraisers and valuators can arriveat different values for business andassets due to differences inassumptions and data.

Given the ability to revalue assets tofair value, some managers maychoose to shop their appraisals orvaluations or, in the extreme, simplyfabricate them.


7/14

The flexibility offered to managers on the numberpresented on the financial statements increases tof fraud.

Under IFRS, investment property purchasedwith $1 million can be appreciated to the fairvalue of $4 million, which increases the valueof total assets.

The appraised amount is recorded directly inretained earnings.

Given the ability to revalue assets to fair value,some mangers may choose to shop theirappraisals or valuations or, in the extreme,simply fabricate them.

Lafleche, Daniel, and Patrick Mcparland. "Transition Anomaly or Fraud?" (Summer 2010): n. pag. Web. 6 Mar. 2014.


8/14

Under IFRS, managers may manipulate the numthus decreases debt-to-equity ratio.


9/14

Accountants and auditors think that in case IFRS is apcomprehensibility and reliability of financial statemenincrease, at the same time accounting frauds shall de

Based on firm-level observation for 21 countries, IASadopters display lower earnings management,greater conditional accounting conservatism, andhigher value relevance.

Under principles-based standards, auditors constrainaggressive reporting more under a weakerregulatory regime than under a stronger regulatory

regime.

IFRS encourage reporters to greater exercise ofprofessional judgment, which will increase inreporting discretion, without the necessaryconstraints of enforcements, can be abused andhence result in a decline in reporting quality.


10/14

A higher incidence of corporate accounting fraud occurred inside the as compared to outside the United.

Only eight countries out of 19 classified as following IFRS reported accounting sthe 2001-2005 period.

During the five years, more than three times as many accounting scandals wereUnited States than in principles-based jurisdictions statements with all other thin

Countries Reporting Accounting

During the Period 2001 - 2005

Rules-Based GAAP Principles-Based GAAP (

United States Australia, France, IrelanNetherlands, Switzerland, Un

Nisbett, Accounting Scandals: Rules vs. Principles Matter?, November 2007, Tennessee 10


11/14

Kenya represents one of the few countries to adopt IFRScountry level.

Kenya, which represents a country inthe early stages of economicdevelopment, suffers from weakinstitutions and a lack of resourcesand infrastructure.

In 1999, Kenya Companies Actrequires all companies to adopt IFRSand to present accounts that show a

true and fair view of the companysaffairs.(Improvement #1 or weakness in oldGAAP system)

Improvement#2


12/14

Armstrong et al. (2010) find that IFRS adoption events ingenerated positive capital market reactions.

Differences in institutional context,cultural factors and business

environment make Europeanaccounting system different from eachother.

The introduction of IASB standard hasnot let to a systematic improvement ofthe earning management.

Legal enforcement is positively relatedwith the reduction of earningsmanagement.

3 examples: implementation indeveloped countries.


13/14

The IFRS adoption improved accounting quality of China, which isdeveloping country with regulated market under rapid change.

Chinas change toward a free-marketenterprise system makes accounting

systems developed under socialistphilosophy totally inadequate for theemerging capitalist structure.

Chinese listed firms mandated to reportwith substantially IFRS-convergentaccounting standard since 2007.(details on improvement since 2007)

The accounting quality in Chinaimproved with decreased earningsmanagement and increased valuerelevance of accounting measures.

C t i h hi h i k f f d


14/14

Countries have higher risk of fraud cuse the COSO framework to mitigatrisk.

Setting the right tone at the top canhelp building an ethicalenvironment.

Performing an IFRS conversionfraud risk assessment can help

identifying potential fraud risks andschemes.

Designing and implementingantifraud control activities withclose monitoring can effectivelymanage risks.

a582 preliminary review

Documents