The Accrual Accounting is susceptible to the commission of financial fraud.
The last Friday, November 30 of this year, was published by Joel Rosenblatt from Bloomberg News that Michael Lynch, the former chief executive officer of Autonomy Corp., stepped down as an adviser to U.K. Prime Minister Theresa May after he was charged with fraud by the U.S.
"The indictment stems from the British software maker’s 2011 sale to Hewlett-Packard Co. Prosecutors had long identified Lynch, 53, as a co-conspirator with his chief financial officer at Autonomy, Sushovan Hussain, who was found guilty in April of orchestrating an accounting fraud to arrive at the $10.3 billion price Hewlett-Packard paid for the company".
The article also says: "Lynch used false and misleading statements from 2009, 2010 and early 2011 "to make Autonomy more attractive to a potential purchaser like HP,” according to the indictment, which says Lynch made $815 million when HP acquired his Autonomy shares.
In accrual accounting there is a risk for earnings manipulation because requires manager's judgment to understand de statements.
Under accrual accounting is necessary to adjust entries to ensure that the account reflects the economic reality of the firm. For this reason in accrual accounting the profits are not necessarily equal to changes in cash. I'm sure that part of the methodology used by Lynch to make Autonomy's Statements "more attractive" to Hewlett-Packard Co consist on the implementation of some tricks with the accruals that inflated its revenues or its cash flows.
This is way i think this article is very interesting and important, cause we can face in reality the consequences of mislead or ignore the mayor principles of Accrual Accounting and Revenue Recognition. It is imperative then, that we ensure ourselves to put in practice this knowledge in out daily lives may we not finish like Michael Lynch. For more detailed information about this issue i invite you to read the full version of this article in the next link