IFRS: The Fraud Gateway

Using this new system will make the accounting process considerable easier because a uniform system will aid in the interpreting and auditing processes for some companies. Considering the fact that the world is facing a financial crisis, many nations are willing to create "a single set of high-quality global financial reporting standards" (Cancino). The main issue with the new international standards, however, is compliance and auditing issues. Some experts feel that fraud will become rampant among foreign and domestic countries.

Auditors across the world have offered many arguments against the new international reporting system. The first issue on the minds of many auditors is the basis of current and future principles. The current Generally Accepted Accounting Principles (GAAP) system is both a principle and rules based system. The potential IFRS is solely principles based. This difference will require management to change the compliance-based approach to an economic-value approach with regards to financial reporting. With more human involvement, many auditors believe the risk of fraud and misstatement will increase. Another problem with the new system is the change to the review and adaptation of existing accounting policies and procedures. Upper management will have to adopt a new judgment-based approach to certain problems. For example, they will decide the "timing and proportion of revenue recognition, timing and value of expense recognition of share-based payments...[and] timing, value, and reporting of expense recognition of employee benefits" (Cancino). The value judgment element will be a major problem for companies and the consumers of the financial statements. This element will the heart of any fraud schemes that occur after the adoption of the IFRS. Companies will most likely take advantage of this judgment and mislead all readers of financial statements. Some of the potential problems and schemes include "altering the valuation of accounts receivable by failing to establish appropriate reserves and allowances and recognize related expenses, manipulating the methods to value inventory, creating an overstatement of inventory quantities and unit costs, writing off inventory when future value cpa2biz exists, overstating the value of assets, and inappropriately recognizing revenue and expenses" (Cancino). Businesses and firms will take the new system and abuse it, causing them to commit tax fraud and other fraud schemes that would inevitable hurt their reputations.Prevention is the key thing on many upper management individuals' minds. How will firms, with the new power to control their financial statements, want to manage the risk involved? "Not only will the basis for reporting numbers change, internal controls over financial reporting need to change as well. The old accounting policies and procedures may not be effective in light of the new basis of accounting, and companies must be prepared to make wholesale changes to internal controls if they want their numbers to be credible and reliable" (Coenen). Preventing risk will be the hardest problem that will arise from the adoption of the IFRS.

The world is in the midst of an accounting hurricane as companies and organizations attempt to combine the world's accounting systems into one uniform process, the Interational Financial Reporting Standards. Many auditors believe, even with the benefits of the switch, that fraud will become rampant among companies. There will be less focus on procedures allowing companies to create their own statements.