Impact of Flexibility in Accounting on Financial Reporting (Published)
This essay explores the nature of flexibility in accounting, why it exists and its consequences for financial reporting. Flexibility in accounting (as opposed to rigidity or uniformity in accounting) offers preparers of accounting reports the ability to make acceptable adaptations or variations including the use of estimates including fair values, multiple and varied types of measurements, judgments and invoke “materiality” thresholds to record and report information. Flexibility offers the reporting managers opportunities to exercise professional judgment and discretion in determining the proper recording of transactions offered by accounting standards (Rooijen, 2002; Parfet, 2000). Financial reporting regulators (e.g., Levitt, (1998: 2), a former Chairman of the American Securities and Exchange Commission) also support flexibility in accounting, although they have been constrained to observe that in some cases, preparers of financial statements have exploited the allowed flexibility to create illusions in their financial reports; illusions that are anything but true and fair reporting (Levitt, 1998). In particular, some public companies (such as Enron) have been known to abuse the legitimate flexibility in the application of accounting standards to produce financial results that distort performance and even slide down the slippery slope to fraud.