Accounting for Expenses

A Risk-Prone Area

Jim Martin, PhD, CPA

Next to revenue recognition, accounting for expenses gives accountants more headaches than any other type of transaction. In 2000, the Public Oversight Board's Panel on Audit Effectiveness Report and Recommendations found that, among the seven most frequently misstated transactions and accounts, expenses ranked second behind revenue. Several years ago, this author analyzed common pitfalls in the revenue area (“Auditor Skepticism and Revenue Transactions,” The CPA Journal, August 2002). The author has now analyzed recent SEC Accounting and Auditing Enforcement Releases (AAER) that deal with expense misstatements. The study is confined to AAERs issued in the 2000-2007 period. A discussion of the techniques used to misstate expenses can provide lessons to auditors that may prove helpful on future audits.