It stands to reason that accounting areas that are highly subjective and complex also are prone to fraud, errors, and breakdowns in internal controls.
A recent study discovered challenges in these accounting areas and led to new recommendations for company accounting policies and internal control over financial reporting (ICFR). The details are described in the Anti-Fraud Collaboration report, Addressing Challenges for Highly Subjective and Complex Accounting Areas, which offered the following recommendations for company accounting policies and ICFR:
- Accounting policies must adhere to technical accounting guidance. Supervisors and managers are responsible for implementation. It is critical that nonaccountants who may not know the nuances of technical accounting be able to understand these policies.
- Process must be married to policies. Accounting policies must be reviewed at regular intervals and address how to uncover and monitor changes in activities that affect accounting.
- Policies must be tested in the field prior to implementation and then monitored for compliance post-implementation.
- Accounting policies regarding revenue recognition should be granular because even slight changes in contract terms can have a major impact on revenue.
- Tone at the top is an essential component of an ICFR regime.
- A risk-based evaluation is the best approach for achieving effectiveness and efficiency in ICFR.
- Internal controls over unusual and nonroutine transactions are sometimes overlooked or given less attention than core processes when developing an effective ICFR regime.
The Anti-Fraud Collaboration consists of the Center for Audit Quality (CAQ), which is affiliated with the AICPA; Financial Executives International; the National Association of Corporate Directors; and the Institute of Internal Auditors. It promotes the deterrence and detection of financial reporting fraud.