The Primacy of Fair Presentation: Evidence From Regulators and the Courts

25 Pages Posted: 12 Mar 2018

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Clive S. Lennox

University of Southern California

Jieying Zhang

The University of Texas at Dallas

Date Written: February 15, 2018

Abstract

Palmrose and Kinney (2017) (PK) claim that technical compliance with GAAP is sufficient to justify an unqualified audit opinion. We disagree. PK's view ignores "fair presentation," a concept equivalent to "faithful representation." Their "technical compliance" view portrays GAAP as a set of black and white rules and auditing as a box-checking exercise, contradicting guidance from the SEC, FASB, IASB, PCAOB, and the courts. We show that the compliance mindset advocated by PK is responsible for many audit failures, including Enron, WorldCom, and Lehman Brothers. PK's view has long been used by auditing firms and their expert witnesses in (unsuccessful) attempts to avoid legal liability. Unfortunately, it is also a view that has greatly damaged the credibility of the auditing profession.

Suggested Citation

DeFond, Mark and Lennox, Clive and Zhang, Jieying, The Primacy of Fair Presentation: Evidence From Regulators and the Courts (February 15, 2018). Accounting Horizons, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3136203

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Jieying Zhang

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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