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23 Accounting Minefields That Drive Management
to Question Financial Statement Quality

Revenue measurement and recognition

• How is revenue defined? What event triggers its recognition?

• Does this definition of revenue generate a reasonable measure o revenue earned by the business during the reporting period?

• Is this definition of revenue consistent with revenue measures used by domestic and global competitors?

• If the company measures revenue in an unusual or new way, is that disclosed?

• Is the approach justified in terms of its risks and advantages?

Provisions for uncertain future costs

• Are estimates for uncertain events included in the financial statements?

• Do the financial statements present a reasonable measure of current-period operating expenses and revenues? Is there sufficient disclosure in the footnotes of these estimates and their accounting treatment?

• Should gains and losses included in comprehensive income and in the footnotes instead by included in the current period's net income?

Asset Valuation

• Do tangible and intangible asset values and write-downs of assets reflect real values and changes in value during the current period?

• Are these value adjustments fully disclosed?

• Is the accounting treatment consistent with industry and global competitors? If not, are the differences justifiable and adequately discussed in the financial statements?

Derivatives

• What hedging programs are in place?

• To what extent are derivates used?

• Are proper safeguards in place to protect against their abuse?

• What are the worst-case scenarios of the company's use of derivatives?

• Is the accounting treatment complete and in the spirit of GAAP?

• Is GAAP treatment sufficient to describe the business value and risks of the derivative program?

Related Party Transactions

• Are all significant related party transactions and commitments disclosed?

• What policy determines which transactions will be disclosed and what level of detail will be included in the financial statements?

• Are there conflicts of interest that could damage or benefit specific groups of shareholders that should be disclosed?

Information Use for Benchmarking Performance

• Are there any aspects of the accounting methods used that may cause investors, security analysts, compensation committees of the board, or others to under- or over- assess the business financial performance during the current reporting period?

• Are there differences between the company's financial reports and its competitors' that need to be disclosed?

Source: PricewaterhoseCoopers CFODirect Network, "23 accounting minefields that drive management to question financial statement quality," © 10/03/2001 copyright held by The Controllers Report.