GAAP as Ineffective Legal Defense of Financial Reporting: Implications for Truthfulness, Auditability, and the IASB's Proposed 2015 Conceptual Framework

Abstract

This paper analyzes the accounting reasoning of two expert accounting witnesses at the 2006 trial of Enron executives who testified that the financial reporting of Enron conformed fully with US generally accepted accounting principles [GAAP]. We analyze the experts’ evidence using argumentation theory to highlight important issues in the reasoning process underlying financial reporting as support for our critique of the IASB’s proposed 2015 Conceptual Framework. We make two recommendations. First, that a CF should be allowed to override any detailed standard whenever that standard results in untruthful/unethical reporting. This effectively means that the CF should be installed at the top of any GAAP hierarchy as the dominant item guiding standard setting and professional practice. Second, that the concept of ‘faithful representation’ should invoke the concept of ‘verifiably acceptable levels of accounting risk’ in order to incorporate the notion of truthfulness of forecasts in accounting estimates.