--- title: Beware of the Gray Areas in Accounting description: Machen McChesney shares caution around financial statements and the fraud associated with some of the complexities in the accounting rules. image: https://info.machen.cpa/hubfs/Accounting%20-1371877270-1.jpeg --- [Family of Services](http://machenmcchesney.com/about-us/family-of-companies/)  |  [CPA & Business Advisory](http://machenmcchesney.com)  |  [Payroll, HR & Benefits](http://focuspaysolutions.com/)  |  [Wealth Management](http://machenmcchesney.com/services/financial-planning-and-wealth-mangement-services/) Auburn-Opelika (334) 887-7022 | Montgomery (334) 244-8900 [![mm-re-cobrand-fd-blues](https://info.machen.cpa/hs-fs/hubfs/mm-re-cobrand-fd-blues.png?width=279&height=100&name=mm-re-cobrand-fd-blues.png)](http://machenmcchesney.com) Search this site on Google Search Google Search this site on Google Search Google - [Client Portal](https://machenmcchesney.sharefile.com/Authentication/Login) - [1040 Electronic Organizer](https://www.my1040data.com/account/login/HT7902990) - 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Waller, CPA](https://info.machen.cpa/blog/author/aaron-k-waller-cpa) on Apr 24, 2023, 11:43:20 AM - [Tweet](https://twitter.com/share) [![Accounting -1371877270-1](https://info.machen.cpa/hs-fs/hubfs/Accounting%20-1371877270-1.jpeg?width=1024&height=300&name=Accounting%20-1371877270-1.jpeg)](https://info.machen.cpa/blog/beware-of-the-gray-areas-in-accounting)Accounting and auditing standards have come under scrutiny in the wake of recent high-profile bank failures. Investigations are currently underway about what went wrong with Silicon Valley Bank and Signature Bank. But it’s likely that some “gray areas” in the accounting rules were exploited to make these organizations appear more economically secure in their year-end financial statements than they truly were. **Lessons from Enron** Andrew Fastow often speaks publicly about the issue of financial misstatement. As a convicted felon, Fastow has a unique perspective on fraud: He was the CFO of Enron in October 2001 — when it became the largest U.S. bankruptcy of its time. In March 2023, Fastow presented to the Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes-Oxley Act of 2002 to prevent another Enron-like scandal. He advised the PCAOB to consider amending the accounting and auditing rules to help prevent corporate fraud. Instead of focusing on finding the *intentional* fraudulent entry, Fastow said the PCAOB should concentrate on “fraud that occurs by exploiting loopholes for the ambiguity and complexity in the rules.” The latter is more the Enron story than recording the wrong number purposely, according to Fastow. **Compliance vs. reality** To elaborate, he gave a simple example of how financial statements, while perfectly in compliance with the rules, could be divorced from economic reality: In 2014, the average price of oil was $95 per barrel. For most of the year, the price was $110, but it dropped to $50 at year-end. Under the accounting rules at that time, companies were supposed to take the price of oil on the first day of each of the 12 preceding months and average it. The result of this calculation was $95, but the market price was $50 when oil and gas companies released their financial statements. Fastow said that every oil and gas company followed the rule and used $95 per barrel to report their reserves — even though the market price was $50 at year-end. “All of them massively overstated their economically recoverable reserves, which is perhaps the most important metric that Wall Street looks at when they evaluate independent oil and gas companies. The mindset among people is so long as you’re following the rules, it doesn’t matter if the financial statements are misleading,” concluded Fastow. **Complex problem** Charles Niemeier, a former founding member of the PCAOB, said solving the issue of financial reporting fraud is bigger than just revamping the auditing standards. And the challenge is greater for financial reporting matters that rely on subjective judgment calls. For instance, accounting estimates may be based on subjective or objective information (or both) and involve some level of measurement uncertainty. Examples of accounting estimates include allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets. Some estimates may be easily determinable, but many are inherently subjective or complex. Another matter that may be susceptible to manipulation is the going concern assessment, which underlies all financial reporting under U.S. Generally Accepted Accounting Principles. The accounting rules give a company’s management the final responsibility to decide whether there’s substantial doubt about the company’s ability to continue as a going concern and to provide related footnote disclosures. The standard provides guidance to management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that companies commonly provide in their footnotes. **We can help** Financial misstatement can happen when managers use the gray areas in financial reporting to their advantage, especially as the rules have moved from historical cost in favor of fair value estimates. When making subjective estimates and evaluating the going concern assumption, it’s important to step back and ask whether your company’s financial statements, while in compliance with the rules, could potentially mislead investors. Contact us to address questions you may have about these complex matters. We can help you understand the rules and assess current market conditions. **For more information on the above article or any [audit & assurance services](https://machenmcchesney.com/services/audit-assurance/?__hstc=31761121.6de975eee04bf28563fdf1daa415e270.1659647291102.1682350405365.1682353944391.361&__hssc=31761121.4.1682353944391&__hsfp=2117639731), contact Aaron Waller, CPA, at (334) 887-7022 or by leaving us a message below.**    Topics: [Audit & Assurance](https://info.machen.cpa/blog/topic/audit-assurance) Search this site on Google Search Google ### Recent Posts ### Subscribe to Blog ### Posts by Category - [Business Tax (356)](https://info.machen.cpa/blog/topic/business-tax) - [Business Advisory (239)](https://info.machen.cpa/blog/topic/business-advisory) - [Payroll, HR & Benefits (124)](https://info.machen.cpa/blog/topic/payroll-hr-benefits) - [Audit & Assurance (113)](https://info.machen.cpa/blog/topic/audit-assurance) - [Accounting & Outsourcing (81)](https://info.machen.cpa/blog/topic/accounting-outsourcing) - [Individual Tax (75)](https://info.machen.cpa/blog/topic/individual-tax) - [Tax Planning (33)](https://info.machen.cpa/blog/topic/tax-planning) - [Tax Updates (25)](https://info.machen.cpa/blog/topic/tax-updates) - [Retirement & Wealth Management Planning (18)](https://info.machen.cpa/blog/topic/retirement-wealth-management-planning) - [Taxation (15)](https://info.machen.cpa/blog/topic/taxation) - [Alerts (13)](https://info.machen.cpa/blog/topic/alerts) - [Business Valuation (11)](https://info.machen.cpa/blog/topic/business-valuation) - [News & Events (11)](https://info.machen.cpa/blog/topic/news-events) - [Tax News (11)](https://info.machen.cpa/blog/topic/tax-news) - [Individual Tax Planning (10)](https://info.machen.cpa/blog/topic/individual-tax-planning) - [Not For Profit (10)](https://info.machen.cpa/blog/topic/not-for-profit) - [Retirement Planning (9)](https://info.machen.cpa/blog/topic/retirement-planning) - [Estate Planning (8)](https://info.machen.cpa/blog/topic/estate-planning) - [Manufacturing Industry Insights (7)](https://info.machen.cpa/blog/topic/manufacturing-industry-insights) - [Individuals (1)](https://info.machen.cpa/blog/topic/individuals) - [Insider (1)](https://info.machen.cpa/blog/topic/insider) - [Professional Standard News (1)](https://info.machen.cpa/blog/topic/professional-standard-news) see all [![Returning\_Value](https://info.machen.cpa/hs-fs/file-2504250850-jpg/Machen-Blog-Image/Returning_Value.jpg)](http://machenmcchesney.com/about-us/mission-and-values/) - [![AICPA](https://machenmcchesney.com/img/logos/aicpa.jpg)](https://www.aicpa-cima.com/) - [![NACVA](https://machenmcchesney.com/img/logos/nacva.jpg)](http://www.nacva.com/) - ![2026 INSIDE Public Accounting Top 400](https://machenmcchesney.com/img/2026-ipa-top-400.jpg) - ![2026 Best of Auburn-Opelika](https://machenmcchesney.com/img/2026-best-of-auburn-opelika.jpg) - [![2025 Best of OA](https://machenmcchesney.com/img/2025-best-of-oa.jpg)](https://oanow.com/exclusive/readerschoice/ballot-2025/) - ![2026 Best of OA Winner](https://machenmcchesney.com/img/2026-best-of-oa-winner.jpg) - [![2025 Accounting Today Regional Leaders](https://machenmcchesney.com/img/2025-accounting-today-regional-leaders.jpg)](https://www.accountingtoday.com/) - [![ClearlyRated Best of Accounting](https://machenmcchesney.com/img/2024-best-of-accounting.jpg)](https://www.clearlyrated.com/accounting) - [![ClearlyRated Best of Accounting Employee](https://machenmcchesney.com/img/2024-best-of-accounting-employee.jpg)](https://www.clearlyrated.com/accounting) 1820 East University Drive, Auburn, AL 36830 | Tel: (334) 887-7022 | Fax: (334) 887-7221 1761 Taliaferro Trail, Montgomery, AL 36117 | Tel: (334) 244-8900 | Fax: (334) 364-0927 † This is not a CPA firm. \* Assurance, attest, and audit services provided by Frazier & Deeter, LLC. “Frazier & Deeter” is the brand name under which Frazier & Deeter, LLC\* and Frazier & Deeter Advisory, LLC† and its subsidiary entities provide professional services. 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