The additional professional judgment required by the new revenue recognition standard could expose companies to an increased level of fraud, given the inherent opportunity for bias created by a principles-based framework.
The new standard moves companies away from a rules-based framework to a more principles-based approach as it relates to the way they report financial information. In some cases, that could increase exposure to fraud or noncompliance during the transitional period, as well as the first few years after adoption, according to a new report from Deloitte.
While the introduction of additional judgments and estimates may provide greater opportunity for fraud, the additional disclosures required by the standard theoretically would make it more difficult for the fraudsters to cover their tracks when justifying certain financial reporting practices. Still, internal auditors might want to increase their scrutiny of revenue recognition with heightened awareness of the potential for fraud and ensure that good internal controls are functioning properly around revenue recognition and accounts receivable, contracts, sales incentives, and related-party transactions.