Flexibility in Accounting: A Slippery Slope to Fraud?

Abstract

The paper explores the idea that earnings fraud follows a slippery slope wherein companies manage earnings "legitimately” to achieve pre-determined targets, then aggressively in an effort to achieve the desired results; if the desired results are still not achieved, then, the only option open is to "cook the books” by falsifying documents. Four illustrative cases of fraudulent companies were analysed qualitatively to assess how the slope of earnings management was slippery; and over time earnings management became fraud. The outcomes are that whenever there is a need to meet internal or external earnings expectations, conceal the company's deteriorating financial condition, increase the stock price or increase management compensation based on financial results; flexibility in accounting standards have provided an opportunity to manage earnings legitimately, aggressively and then fraudulently. While flexibility in accounting is sacrosanct; it is recommended that managers be mindful that the slope of earnings management could be slippery enough to lead to fraud; they should therefore be mindful of those repetitive "small indiscretions”. If possible, managers should address those small deceptive acts; they should clearly delineate what is allowed and what is absolutely forbidden. Furthermore, managers should ensure that governance mechanisms and codes of conduct and ethics of corporations are adhered to and rigorously enforced.