In a debate, specialists analyze concepts of fraud and earnings management and explore incentives and practices in accounting
On June 18, we held the webinar Fraudes contábeis e gerenciamento de resultados: podemos confiar nos balanços? (Accounting fraud and earnings management: Can we trust balance sheets?) At the meeting, Insper professors Eric Barreto and Camila Boscov, and José Elias Feres de Almeida, president of the Brazilian Association of Graduate Programs in Accounting, discussed possible similarities, differences, and confusion regarding the concepts of fraud and earnings management in accounting. They also explored some incentives and practices. Insper professor Cristiane Kussaba was the mediator.
José Elias started the debate by explaining the difference between the concepts of earnings management and accounting fraud. “Earnings management is the flexibility that accounting standards themselves and laws allow while fraud is characterized when there is the recognition of transactions that did not occur, aiming at deceiving investors and creditors.”
According to Eric, fraud is initially characterized as an accounting error. “However, a company is only said to be committing fraud when intent can be recognized. As intent is something complicated to prove, a possible change is usually treated as an error, unless there is evidence to the contrary.”
The incentive environment for the occurrence of fraud, according to José Elias, varies according to companies’ governance structures. “Where that governance is weak, there is more freedom for making uninteresting decisions. More transparent companies with effective corporate governance, on the other hand, help reduce incentives that lead to those practices.”
Recurrence of fraud
The debate included participation from the audience, who submitted questions on various topics. Among them, ones regarding the recurrence of fraud. According to Eric, fraud is a device used for the purpose of circumventing rules. “So, if there is a known fraud, the next one will be different from that first one. Repeat fraud does happen, but usually not in a sequence. The procedure falls into oblivion before it happens again.” For example, the similarities and differences of the cases of the energy company Enron in 2001, and Lehman Brothers, a bank that went bankrupt in 2008, were analyzed.
The interaction also raised a conversation about the role of external and internal auditors in preventing accounting fraud and the importance of the explanatory notes to the financial statements.