As an investor, you may need to look many companies’ financial statements and compare them with each other to make the best choice.  While you are going through this tedious, boring but critical procedure, you definitely want the work to be easier. But, how?  At least we can keep a standard format for all financial statement, which is GAAP (Generally Accepted Accounting Principles).  GAAP is a combined standard that determine how to record and report accounting information so that companies can keep a level of consistency and accuracy in financial analyzing.  Though GAAP is a general standard, there are still other specified principles and different companies may have their own flexibilities, especially when they are making an internal used management financial statement.  FASB (Financial Accounting Standards Board) is another standard based on GAAP and aims to serve in the US.  Therefore, though the standard makes it easier for investors to compare different companied, they still need to scrutinize each statement since companies may use varied methods to count their assets, debt, etc.

Watch the video to know more

Link: GAAP

Resources:

http://www.investopedia.com/terms/f/fasb.asp

http://www.investopedia.com/terms/g/gaap.asp

http://www.investopedia.com/video/play/generally-accepted-accounting-principles-gaap/

As we know that financial statement fraud is “the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements in order to deceive financial statement users.”  The temptations to commit this fraud may come from “situational pressure”, “perceived opportunity” and “rationalization”.  One of the most famous fraudulent financial statements is Enron scandal.  Enron was a Houston-based energy and service corporation. In 2000, the executives Kenneth Lay, Andrew Fastow and Jeffrey Skilling made this deadly choice that hides huge debts and reports big potential profits.  This choice shortly boosted the company’s stock price before catching people’s suspicion.  In the end, the company went bankrupt. Stockholders lost about $74 billion and 90,000 employees lost their jobs.  The executives were found guilty and sentenced into prison.  What I can tell is that honesty and business ethics are very important for accountant and company executive.  It is considered irresponsible and inappropriate to pursue self-interest by sacrificing social interest.  Both awareness and management need to be promoted to reduce the chance of fraud happening.

Resources:

https://www.google.ca/search?hl=zh-CN&site=imghp&tbm=isch&source=hp&biw=1366&bih=577&q=enron&oq=enron&gs_l=img.3..0l2j0i24l8.1547.2920.0.4443.5.5.0.0.0.0.94.305.5.5.0….0…1ac.1.27.img..0.5.304.REF4tS_WADk#facrc=_&imgdii=_&imgrc=lrLmJ5NZa-WJKM%3A%3Bxle2AhJm0LiziM%3Bhttp%253A%252F%252Fwww.corpwatch.org%252Fimg%252Foriginal%252Ff-enroncartoon.jpg%3Bhttp%253A%252F%252Fwww.corpwatch.org%252Farticle.php%253Fid%253D7828%3B300%3B300

http://www.accounting-degree.org/scandals/

http://www.mademan.com/mm/enron-scandal-summary.html