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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?
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?
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.