Accounting conventions are rules that businesses employ to determine how to record specific

business transactions that accounting standards do not yet fully cover. Although not legally
binding, these guidelines and practices are typically accepted by accounting organizations.
Accounting practices are a set of rules for convoluted and ambiguous commercial transactions.
These norms consider comparison, relevance, full disclosure of transactions, and application in
financial statements while standardizing the financial reporting process. Some of the accounting
conventions include the GAAP or Generally Accepted Accounting Principles and the IAS or the
Indian Accounting Standards.
GAAP
A unified set of accounting guidelines, methods, and standards known as generally accepted
accounting principles (GAAP) were released by the Financial Accounting Standards Board
(FASB). When their accountants put together a public company's financial statements, they must
adhere to GAAP in the United States. Ten basic principles serve as the framework for GAAP,
which is a set of regulations. The International Financial Reporting Standards (IFRS), which are
seen as more of a principles-based norm, are frequently used as a comparison. There have
recently been initiatives to move GAAP reporting to IFRS because it is a more global standard.
GAAP Is Important, But Why?
GAAP is significant since it contributes to preserving market confidence. Investors would be less
inclined to believe the information supplied to them by corporations because they would have
less faith in the accuracy of it if it were not for GAAP. Without that trust, fewer transactions
might occur, which could result in greater transaction costs and a weaker economy. By making it
simpler to compare two companies "apples to apples," GAAP also aids investors in their analysis
of public corporations.
Indian Accounting Standards
Accounting Standards in India or the Indian Accounting Standards were implemented to
standardize standards for international accounting and reporting, the AKAIIND As. The entire
accounting process used in the economy is standardized by accounting standards.
Following the adoption of these accounting standards, all businesses record transactions in the
same way. It aims to make the entire accounting system simple to understand for everyone
working in the corporate world.
SOME OF THE COMMON GAAP VIOLATIONS
1. An increase in rent
Lessors frequently provide financial incentives as a way to get lessees to sign a rental agreement.
These incentives frequently consist of "free rent" at the start of the conclusion of the lease
agreement. If a more logical basis cannot be identified, GAAP accounting mandates that
operating lease expenses be recognized on a straight-line basis. To calculate monthly rent
expense, lessees must divide the total rent paid over the lease term by the number of months in
the lease. Any discrepancy between payments and expenses would be recorded on the balance
sheet as either a current or non-current asset or liability.
2. Capitalizing Operating Expenses
The capitalization of overhead is a criterion for reporting that is frequently disregarded. When
valuing the creation of inventory, direct costs like labor and raw materials are sometimes the
only factors considered. Usually, the basis of the value of inventory does not include overhead or
does so erroneously. A deviation from GAAP reporting would be the removal of overhead.
Overhead is dependent on fixed and variable components, both of which are based on formulas
created by capacity vs. production for cost allocation and actual consumption drivers. Large
inventory valuation errors on the balance sheet and associated cost of goods sold inaccuracies on
the income statement may result from failing to apply overhead estimates.
3. Depreciation
The tax code has permitted faster depreciation options throughout the previous ten years,
including Section 179 expensing (up to $500,000 in some years) and bonus depreciation. Fixed
asset depreciation for book purposes often mirrored that of the tax method prior to the
implementation of these accelerated procedures. According to FASB ASC Topic 740, these
accelerated tax techniques of depreciation do not adhere to GAAP reporting requirements.
Structural building improvements made to leased property would typically be depreciated over
39 years for tax purposes in addition to accelerated depreciation; however, GAAP mandates that
these improvements should be depreciated over the shorter of their useful life or the lease term,
including renewable options that are anticipated to be exercised.
4. Doubtful Tax Situations
In order for a tax position taken in a previously filed tax return or one that will be taken on future
tax returns to be recorded in the financial statements, FASB ASC Topic 740 created a threshold
condition. A two-step approach must be followed in order to recognize uncertain tax positions:
A tax stance is "more likely than not" (more than 50%) to be upheld in an IRS examination. The
biggest amount of tax advantage or expense that is more likely than 50% is used to determine the
tax status. Businesses continue to expand into new markets thanks to the simplicity and
accessibility of access to markets outside of their home state.
Accounting Concepts
There are some accounting concepts that also help determine whether a firm is abiding by the
correct methods of recording their financial statements without committing any fraudulent acts.
Some of the crucial accounting notions
Concepts are categorized by accounting organizations as being founded on principles or
assumptions. Based on these presumptions and standards, every sort of business, including a sole
proprietorship, partnership, or public or private firm, documents its financial transactions. Some
of the key accounting ideas are as follows:
1. The idea of a business entity
The concept of a business entity, economic entity, or separate entity is predicated on the notion
that a firm is autonomous from its owner. A firm is not allowed to keep track of its owner's
personal costs, earnings, obligations, or assets. It makes it easier to accurately track a company's
costs, revenues, and tax deductions. It also protects a business owner's personal funds and
enhances their credit standing. It more correctly depicts cash flow and financial situation.
2. The going concern idea
According to the "going concern" idea, accountants should compile financial statements under
the presumption that a company may continue to operate for a reasonable amount of time. The
term "foreseeable future" as used in this notion refers to a time frame starting 12 months after the
conclusion of the reporting period. A business owner or management team cannot use the going
concern concept for accounting if they are committed to completely ceasing all business
operations. The going concern notion is no longer applicable to an organization if it is:
Incapable of paying dividends: being unable to obtain loans from banks and financial
institutions, experiencing losses and negative operating cash flow, and being in a bad financial
situation, making it unable to pay off important debts.
3. Concept of monetary measurement
This accounting principle, which is predicated on assumptions, directs businesses to record only
those transactions that they can quantify and value in terms of money. They do not include a
transaction in their yearly financial statement if it cannot be given a monetary value. Although
these transactions have an impact on a company's financial performance, it may be difficult to
monetize them, therefore they may not appear in financial statements. Employee proficiency,
product quality, employee productivity, market perception, business productivity, and
stakeholder pleasure are a few examples of non-monetary value.
4. Concept of accounting period
The idea of an accounting period establishes a time limit for how long a company must record
and report its financial performance to both internal and external stakeholders. A business's fiscal
year and accounting period may be the same. To analyze its cash flow positions, a company can
set a timetable for internal reporting, such as three or six months, or create monthly financial
reports. The accounting period for internal reporting can be chosen by the management, although
reporting for investors, the government, and taxes is normally for a year.
5. The idea of full disclosure
In order to comply with the full disclosure concept, a corporate organization must provide all
relevant data for the benefit of individuals who read financial statements and reports for audit,
tax, or investment purposes. This idea intends to give crucial financial information to
stakeholders like shareholders, creditors, clients, and investors. Revenue recognition,
depreciation, inventories, taxes, earnings, stock value, leases, and liabilities are all covered by
disclosure policies.
6. The dual aspect idea
Every transaction has an impact on two different business accounts, according to the dual aspect
idea. Then, a business keeps track of both elements for appropriate bookkeeping. Every financial
transaction has a giver or receiver, credit or debit, or both, component. If neither is represented
by an accounting method, errors may appear in the final accounting record. The double-entry
system of bookkeeping, which is now a common technique for auditing and taxation, is built on
the dual aspect notion.
7. Concept of materiality
The materiality idea lays out criteria for determining if financial data is relevant and whether it
can affect someone who is reading a company's financial statements. Based on this idea, a firm
or accountant may eliminate insignificant transactions that would not have an impact on the final
accounts. The rationale for employing the materiality notion changes with the size of a company
and is susceptible to subjective interpretation. A small company may round off its figures in the
final accounting to lakhs, but a large company may do so to crores.
Instances where the Accounting Concepts and the Accounting Standards were violated
Accounting scandal by the Lehman Brothers
The Lehman Brothers accounting debacle serves as an example of the havoc that may be caused
by an apparently insignificant adjustment to an accounting standard. The Repo 105 accounting
flaw was introduced in 2001 by Statement of Financial Accounting Standard (SFAS) No. 140.
Lehman Brothers was able to hide how heavily indebted its investments were thanks to the flaw.
Lehman Brothers was the fourth-largest investment bank in the United States at the time of its
demise in 2008. With 25,000 employees across the globe, the corporation had $639 billion in
assets and $613 billion in liabilities. The bank made significant investments in CDOs and
mortgage-backed securities during the 2003–2004 housing boom. Lehman Brothers generated
$19.3 billion in revenue and $4.2 billion in net income in 2007.
Lehman Brothers had a portfolio of mortgage-backed securities valued at $85 billion when the
financial crisis hit in August 2007, more than any other corporation and four times its
shareholders' equity. The business had a $3.8 billion loss in 2008, including a $5.6 billion write-
down, despite its efforts to lower risk. Lehman Brothers filed for bankruptcy on September 15,
2008, which resulted in a 93% decline in the stock price over the following three days. Richard
Fuld, the former CEO of Lehman Brothers, recognized the bank's accounting errors but
expressed dissatisfaction with the government's decision to deny it a bailout, as opposed to AIG
and other collapsing financial titans. After Lehman Brothers went under, attention was placed on
its auditors, EY, for missing the bank's abuse of the Repo 105 loophole to hide how heavily
leveraged its finances were. Although EY agreed to pay $99 million to Lehman Brothers'
investors in 2013, it disclaimed all liability for the bankruptcies and investor losses that followed.
No one has ever been charged or imprisoned for abusing Repo 105.
The Satyam Computers Scam
India experienced both a financial and an ethical crisis during the global financial crisis of 2008.
Consider a fictitious scenario in the stock market where the most fundamental financial
information a firm provides to you is distorted. In the case of Satyam Computer Services, this
took place. The Raju brothers planned such a massive fraud to fictitiously boost their income.
Profits were predicted to rise dramatically with an increase in revenue. Many investors were
drawn to this, which caused the share price to soar to unprecedented heights. The founders and
promoters of the Satyam enterprises, the Satyam brothers, took advantage of the chance and sold
their assets for a lot more money. With the sale, they made a profit of 1,200 crores.
The brothers achieved this by manipulating the records and bank statements to their advantage.
Most businesses utilize an ERP system for accounting. However, the Raju brothers made use of
their advantages and created their own ERP system for accounting needs. Unlike its competitors,
this system had a lot of flaws. Therefore, for the brothers, inserting false invoices and fictitious
bank statements was child's play. More money was shown on the projected false bank statements
than on the real one.
Simply put, they transferred this cash into a fixed deposit account. These fixed deposits have an
approximate value of 5000 crores. The PWC, who served as the Satyam companies' auditors,
utterly failed to do their job. They didn't check the bank or invoice statements. Not as much
physical verification was done. The auditors were unable to detect the nearly 7,561 fraudulent
bills for around 7-8 years. The board of directors insisted that those FDs be put into some
lucrative ventures. The brothers made the choice to invest money in Matyas at that point. The
board disagreed with the choice, though. This led to numerous issues, which caused the share
prices to drop sharply. The business was required to respond to many inquiries. The strain began
to increase. The brothers decided to reveal the truth after failing to come up with another way
out.

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