Question

One writer recently noted that 99.4% of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?

Answer 1

Concerns about fraudulent financial reporting persist despite the high percentage of companies preparing statements in accordance with GAAP. Statistical fraud, major accounting scandals, and failures in corporate governance are some of the reasons behind this concern.

Step-by-step explanation:

While it is true that 99.4% of all companies prepare statements that are in accordance with GAAP (Generally Accepted Accounting Principles), there is still concern about fraudulent financial reporting for several reasons.

First, statistical fraud can be difficult to spot. Researchers may manipulate data or stop collecting data once they have enough to support their desired outcome, potentially skewing the results.

Second, major accounting scandals like Enron, Tyco International, and WorldCom have exposed the potential for accounting fraud in public corporations. These scandals led to the enactment of the Sarbanes-Oxley Act in 2002, which was designed to increase confidence in financial information and protect investors.

Lastly, accurate information can sometimes be lacking due to failures in corporate governance, which refers to the institutions responsible for overseeing top executives. When corporate governance fails, accurate information may not be readily available, contributing to concerns about fraudulent financial reporting.