Elevating Financial Reporting Beyond a Mere Compliance Instrument^*

Aims and Scope

This paper encourages thinking about how any general accounting conceptual framework (CF) can promote truthful financial reporting and fair presentation. In their standard unmodified report, auditors assert that financial statements “present fairly.” However, there is much controversy about what these words mean (e.g., see Zeff 2007). The analysis we conduct relates to this controversy.

We do not consider differences that arise due to having different user groups in financial reporting, or that some compliance reporting might arise from specific regulatory requirements. We focus on the general-purpose needs identified in FASB and IASB CFs—specifically, the needs of the “maximum number of primary users.” These are defined as “existing and potential investors, lenders and other creditors” (IASB 2018, para. 1.5–1.10). In particular, we identify aspects of CFs that could deter accounting from being used to facilitate lying by management under the guise of “fair presentation.”

We adopt a framework that recognizes fundamental uncertainties in the financial accounting reporting system (articulated, for example, by Barker and Penman 2020, Linsmeier 2020, and Cooper 2020). We refer to these risks and uncertainties collectively as accounting risks. This distinguishes them from audit risks (which we regard to be the uncertainties associated with evidence gathering in the audit of financial statements).¹ Although there is an increasingly active research interest in how to deal with accounting risk, the problem that unverifiable or high levels of accounting risk pose for financial reporting has not been explored. This is despite accounting risk having been a root cause of some notorious cases of corporate reporting fraud and questionable accounting.²

Accounting risk pervades financial reporting because of the increasing use of judgment in accounting estimates when preparing financial statements, thereby creating estimation uncertainty. Generally, accounting risks arise from the risk associated with the judgmental misstatements concept of estimation uncertainty in ISA/CAS 450.A6.³ More specifically, accounting risk is the risk or probability of material misstatement associated with judgments involved in forecasting future events in accounting estimates of financial reporting. Examples of specific accounting/audit failures involving accounting risk include Enron and Lehman Brothers. Smieliauskas et al.  (2018) find that more than half of the litigation involving accounting fraud in North America relates to issues of accounting risk. Moreover, less obvious examples of questionable accounting include the accounting estimates with accounting risk that were at issue in the Nortel trial of 2013 (see Smieliauskas et al. 2019, 35, for a brief summary). Many other Canadian examples can be gleaned from Rosen and Rosen's (2017) review of the Canadian reporting environment. Also, though it was not identified as such, the PCAOB inspection deficiencies related to impairments of land and goodwill involved the accounting risk that arises from different possible future scenarios (Defond et al. 2018, 96–97). Finally, the most recent Canadian Public Accountability Board (CPAB 2021, 2) inspection findings of audit deficiencies included the following: “The most common findings were related to auditing estimates involving significant assumptions and judgments about future conditions or events.” It should thus be evident that accounting risk should be a major concern of preparers and auditors of financial statements.

Some estimates, such as predicting the return on pension assets of defined benefit pension plans, can create very high accounting risks in some years (Christensen et al. 2012; Menzefricke and Smieliauskas 2019). Petroni and Beasley (1996, 157) document very high accounting risk of more than 0.90 for estimates of the reserves needed to cover casualty losses in the insurance industry. With such high risks of failing to detect material misstatements across many audit firms, audit risk largely becomes irrelevant as a basis for indicating audit firm quality (Petroni and Beasley 1996). The recently revised ISA/CAS 540.A125 (IFAC 2018b) acknowledges that in some industries, reasonable ranges for estimates may be multiples of materiality, indicating very high accounting risk estimates (see Smieliauskas 2012). Appendix 1 (para. 23) to ISA/CAS 540 even indicates that the risk may be so great that the “accounting estimate cannot be recognized in the financial statements.” But the guidance there is vague and refers to the “applicable financial reporting framework” and notes that “there may be additional judgments that involve subjectivity to be made.” In this paper we argue that this guidance needs to be improved and put into the CF of financial accounting. We identify ways of doing so using arguments raised at the Enron trial as illustration.

The measurement of accounting risk is an increasingly important issue, too, because the level of intangibles in company valuations has grown from 17% of company value in 1975 to 84% in 2018 (Tett 2021, 167). Many of these intangibles rely on hard-to-measure bartering transactions between technology companies and users⁴ that create unique problems of valuation. A major component is the identification of the future benefits to a company like Facebook of the aggregate effects of such bartering. In other words, it is the accounting risk associated with the future benefits of the bartering activities that can create major problems in valuation. Our concern is that accounting risk tends to be ignored by the profession as a type of “silence” that is considered as a problem for “others” (i.e., outside the accounting profession). However, ethical reporting and the increasingly prominent need to “act in the public interest” suggests that accounting risk should also be of increasing concern for accountants and auditors.

This paper draws attention to how lies can arise by complying with detailed professional accounting rules. It also highlights how conforming with the rules in a particular context can undermine the overall objectives of financial reporting. We focus on the argument used by two expert accounting defense witnesses at the Enron trial to support the claimed validity of Enron's accounting. We find that two accounting concepts, if added to the CF, could have undermined the inapt management/expert witness argument in support of Enron's accounting. First, we call for the objectives of financial reporting to be installed as the overarching premise in a CF for GAAP-based financial reporting. An ancillary aspect of this is that related concepts, principles, and assumptions should also be included in such a CF in a way that will render GAAP and financial reporting more reliant on cogent reasoning by practitioners and standard setters. Second, such a rendering should lead to a CF that emphasizes verifiable levels of truthfulness in the measurements and related disclosures of estimates in financial reports.

We use argument analysis methods to examine the practical reasoning used in the Enron trial testimony to justify Enron's financial reporting. This allows us to better distinguish between compliance and fair presentation reporting.⁵ From the transcript of the trial testimony, we highlight those aspects that were exploited by Enron's management to mislead in its financial reporting. We address these specific weaknesses. We draw attention to improvements that may be needed in the IASB's CF and to shortfalls that should be addressed by standard setters such as the IASB. Our analysis is also relevant to the IAASB's audit standard setting because we highlight the different types of reasoning auditors should be using to evaluate fair presentation reporting versus compliance reporting by an auditee (as outlined in ISA 200).⁶

Although the UK Financial Reporting Council (FRC 2014) states that fair presentation allows departures from codified GAAP, the basis for such departures is not clear. The absence of guidance on this matter appears to have deterred auditors from substantively implementing fair presentation reporting. This was made evident by the call in the Brydon Report (Brydon 2019, 57–59) for a new audit opinion on fair presentation that focuses on verifying the truthfulness of accounting numbers.

Several vexing problems arise from the vagueness and incompleteness of existing CFs and the function of CFs as conceived by practitioners. We make two recommendations to address these, based on the assumption that accountants will need to logically justify their conclusions with persuasive reasoning. We introduce Toulmin's (1958) argumentation theory as an illustration to help auditors apply more rigorous standards of proof for audit conclusions. An audit opinion needs to be justified not only by the evidence but also by the rest of the argument the auditor uses to justify their opinion on the financial statements. Ideally, the audit opinion needs to be justified by an argument.

Argumentation theory teaches auditors (and managers) that it is not sufficient to document a conclusion without also documenting the evidence, key assumptions, principles, explanations, and objectives that relate to meeting the public interest in the engagement. Key features of these should be documented for all professional judgments in the engagement, following the logic that “if it has not been documented then it has not been done.” Technology is making such comprehensive documentation increasingly feasible. Application of more rigorous discipline in argumentation would help a new audit profession to be more accountable and to fulfill the role envisioned for it by Brydon (2019, chap. 6).⁷

One thing missing from Toulmin's framework is the importance of a hierarchy of principles/warrants to implement a principles-based reasoning system (as articulated, for example, by the Institute of Chartered Accountants of Scotland; ICAS 2006). ICAS (2021) and other accounting bodies have now extended principles-based reasoning to ethical reasoning for accounting professionals. This reasoning approach has been adopted by the International Federation of Accountants (IFAC 2018a). The ICAS framework involves a hierarchical reasoning system in which lower-level concepts and rules rely on higher-level principles and objectives. In situations of conflict among these levels, the higher-level concepts override those of lower levels. This leads to more consistency in fair presentation. Nelson et al. (2002) and Palmrose and Kinney (2018) point to a potential downside to principles-based reasoning. This is that “managers are less likely to structure transactions and more likely to convince the auditor that they have interpreted the rules correctly” (Nelson et al. 2002, 180). For this reason, we also encourage auditors to adopt argumentation theory as part of their skill set (as is encouraged in public sector auditing, and discussed later).

In the rest of this paper we focus on the changes that are required to the CF for accounting. We draw particular attention to whether it is acceptable to deviate from the objectives of financial reporting to comply with more detailed guidance provided in particular rules promulgated in standards issued by the accounting profession. This is one problem with the new CF provisions outlined by the IASB (2018). Despite the FRC's (2014) vague explanation of what constitute allowable departures from GAAP, the latest CF presented by the IASB (2018, A13) makes it clear, in para. SP1, that “the CF is not a Standard. Nothing in the CF overrides any Standard or any requirement in a Standard.” The only way practitioners should use the CF is “to develop consistent policies when no Standard applies or if a choice of accounting policy is allowed by a Standard” (IASB 2018, A13). This is not the practice we recommend. Instead, we recommend that the CF be allowed to override a standard when it is necessary to do so to achieve the objectives of a CF.

Thus, the FASB's CF is not much different in this respect from the IASB's, as we show in Appendix 1. Our recommendations apply equally to both CFs. There may be individual standards, such as IAS 37 on contingencies, that conform to one of our recommendations for a CF. However, this is not the same as saying all accounting estimates should conform to this recommendation. The current CFs are not a principles-based reasoning system of the type we see from ICAS (2021) or in provincial codes such as CPA Ontario's (2021) that require that CPAs act in the public interest at all times. A true principles-based accounting system would have the accounting CF act in a similar way to the principles in professional ethics. Thus, any conflict between the goals in the CF and a particular standard should be resolved in favor of meeting the objectives of the CF. We recommend that the CF be viewed as offering a guide to standard setting and that it have an overriding role on practice as well.

This paper also provides further insights to the broader social institution of GAAP and to the potential role a CF can play in guiding accounting theory and practice. It responds to the call by Greenwood and Freeman (2018, 1) to recognize the deep role CFs can have in determining how truthfulness of accounting estimates can be implemented effectively in practice.

A key weakness in the current CF (and something we address) is whether its guidelines encourage financial reporting to serve the public interest by meeting the objectives of the financial reporting system. A particular concern for us is that there are circumstances in which the accounting/auditing concept of material misstatement is equivalent to lying. This can arise through the use of materially misstated information if the auditor points out the material misstatement to management and management refuses to correct it or justify that there is no material misstatement. If the risk of material misstatement/lying is unacceptably high, then the financial statements are not presented fairly. Professional accountants should be encouraged to link the public interest to accounting/auditing standards. If the risk of material misstatement/lying is too high in audited financial statements, then the public interest is not served. Furthermore, standards dealing with the audit of more speculative information (such as audits of explicitly future-oriented financial information) invoke a much more cautious audit reporting approach that explicitly disavows “achievability” of the reported numbers.⁸

Conceptual Framework, Compliance Reporting, and Fair Presentation Reporting

The reasoning with a CF for financial reporting is often conceived as comprising three levels. At the uppermost level are the objectives of financial reporting. From this, at the next level, are identified the concepts, principles, and assumptions that should be applied in seeking to meet those objectives. At the bottom level are detailed accounting standards that are derived from the concepts and principles and from the objectives of financial reporting. The detailed standards relate to specific types of economic events and provide examples of their application. The detailed guidance in accounting standards should be consistent with the objectives and general concepts and principles of the CF.

Compliance reporting aims to satisfy the detailed requirements of accounting standards. Ostensibly, but not necessarily substantively, compliance reporting acts in the interests of general-purpose financial reporting users. Under a compliance view, an auditor is expected to provide reasonable assurance of technical compliance with GAAP for general-purpose financial reporting (Palmrose and Kinney 2018).

Fair presentation reporting, in contrast, should result in the objectives of financial reporting being met. Under the IASB CF (2018, para 1.3), this means being useful for economic decision making and for assessing management's stewardship of an entity's economic resources. Under a fair presentation view, an auditor is expected to provide reasonable assurance of fair presentation. This goes beyond mere technical compliance with the detailed guidance provided by GAAP (Defond et al. 2018). In the trial of Enron's two most senior executives in 2006, the objectives of financial reporting were not met, even though Enron's financial statements conformed with detailed accounting standards. Thus, compliance with GAAP will not necessarily be sufficient to meet the objectives of financial reporting. Fair presentation reporting is closer in spirit to the type of accounting that aims to capture economic substance in a reliable and ethical way. Fair presentation reporting should include a more reliable form of fair value accounting that controls accounting risk in fair value estimates.

In developing detailed guidance for practitioners, standard setters need to make assumptions about the circumstances in which the guidance applies. Deviations from such assumptions create tension between compliance reporting and fair presentation reporting. Since standard setters cannot anticipate every possible situation to which the detailed guidance applies, there is a risk that compliance reporting may not result in fair presentation. Thus, following detailed compliance guidance may not result in meeting the overall financial reporting objectives and should not be considered as axiomatically leading to financial reports that present fairly. This situation has prevailed in several major corporate failures in recent decades (including Enron, discussed later).

Four possible outcomes of financial reporting are shown in Table 1. In Outcome A, audited financial statements comply with GAAP and also provide fair presentation. This is the ideal situation. In Outcome D, neither compliance nor fair presentation is achieved. This is the worst situation. The four-celled matrix of outcomes should be considered with caution. Neither “compliance” nor “fair presentation” should be regarded unequivocally as dichotomous states, as we explain below.

ISAs have attempted to distinguish between compliance reporting and fair presentation reporting. In ISA 200, fair presentation reporting allows material departures and note disclosures beyond GAAP requirements. The different ways departures can be justified include circumstances when the objectives of the CF do not meet the public interest; the assumptions of the CF are not met in the context of a particular firm; the objectives of the CF are not met because of conflicts with broader social norms; and an aspect of a CF is inconsistent with other aspects of the CF so that any type of reporting can follow logically from the inconsistency. Thus, although the words “presented fairly” have clearer meaning under ISAs, the question remains, “What would justify such departures?” Defond et al. (2018) argue that departures may be needed to better capture economic substance in particular situations. If so, departures from GAAP should be justified by logical reasoning that relies on the goals set out in general-purpose financial reporting CFs such as IASB (2018). However, the conditions under which auditors and accountants are justified in departing from IFRS or the FASB's GAAP are unclear. We illustrate the need for clarification in our analysis of court argumentation at the 2006 Enron trial.

Social Construction and the Underlying Reality of What Is “Fair”

Both the compliance and fair presentation approaches downplay the social-constructionist nature of the “dichotomous” decisions that auditors make. Assessing compliance with GAAP and whether a set of financial statements is fairly presented are both negotiated assessments. They reflect the fuzziness of a so-called “underlying reality” of the reporting entity. They also reflect the social and psychological milieu within which the practice of accounting and auditing occurs.

Hines's (1988, 257) view of the “hidden power” of accountants and accounting is pertinent. She regards this power as being rooted in the widespread presumption that accounting communicates reality. In her view, the act of accounting communication helps fashion the alleged reality thus communicated because “people think and act” according “to that picture of reality [and] they make it so: it becomes ‘real in its consequences’.” In a similar vein, Cooper (2013, 245) addresses the myth-like status of accounting by arguing that “perhaps the strongest myth in accounting is that it communicates reality.” She contends that the visible, highly aggregated numbers included in financial statements have strong “hidden power” and that dysfunctional consequences are likely to arise from that power. Thus, we are alert to the idea that “social reality” (e.g., of what constitutes “fair”) is itself a contested concept and that the “reality” of accounting results needs to be contested.

We concur with Hines (1991, 327) that accounting's CF projects “presume, legitimize and reproduce the assumption of an objective world and as such they play a part in constituting the social world.” Drawing from this, we problematize the “compliance” view versus the “fair presentation” view of financial reporting within the context of a CF that is conceived as a socially constructed institution. However, we argue that the fair presentation view should be preferred because of its stronger potential to alert users of accounting information to the equivocal nature of the output of the financial accounting process. One way to resolve the dilemma posed by “alternative realities” is to use convincing argumentation. In applying such argumentation, accounting and its conventions and paraphernalia should not be a hindrance. The logic of accounting should not facilitate fraudulent reporting. What is needed is a reporting system that promotes truthfulness in accounting estimates and fair presentation in meeting the public interest. Changes in the CF are needed to help ensure these outcomes.

We propose that Toulmin's (1958) argumentation concept be implemented to justify conclusions in setting standards, and the reasoning on accounting and auditing issues, in audit file documentation. We also propose changes in the CF that will complement Brydon's (2019, 30–42, 57–59) proposed new conception of the corporate auditing profession. We seek to facilitate the auditability of information that arises from implementing accounting standards. For example, we propose a concept of accounting risk that is fully consistent with estimation risk in financial reporting (as outlined in IASB 2018, para. 2.22). This will help explain the basis for the graduated findings being experimented with in audit practice (Brydon 2019, 76–78). Limiting the disclosure of information to that which is verifiable by an auditor will constrain the scope for financial reporting to reflect alternative, misleading, yet ostensible social realities.

Approach and Main Finding

By means of a detailed analysis of the accounting expert witness testimony in the criminal trial of Enron's president and CEO in 2006, we reveal how a court and jury rejected the compliance view that the accounting expert witnesses advocated. Instead, the court applied a logic consistent with a fair presentation view. Although the arguments of the two expert accounting witnesses supported Enron's published accounting, they failed to address management's accountability to the users of Enron's financial statements. We highlight how the court transcripts reveal the potential for CFs to facilitate fair presentation financial reporting by prioritizing accounting principles over accounting rules.

One of our main findings is that the accounting profession, auditing profession, and financial reporting regulators should give priority to meeting the stated “official” objectives of financial reporting: that is, they should implement a fair presentation view, instead of undermining these objectives by requiring adherence to rules in all circumstances. Another main finding is that limits should be placed on the level of acceptable accounting risk in financial reporting in order to maintain minimum levels of truthfulness in fair presentation financial reporting.

Structure

The remainder of this paper is organized as follows. Section 2 outlines the analytical approach adopted and reviews prior relevant research. Section 3 describes the Enron criminal trial of 2006, outlines its importance, and highlights the central arguments at issue. Section 4 provides an overview of our analysis of the accounting expert witness testimony. The focus is on five main accounting issues raised at trial. We highlight the argumentation factors that were (or ought to have been) critical to the court in ascertaining whether Enron's accounting conformed to GAAP and resulted in fair presentation. Section 5 enters two recommendations and some conclusions.

Argumentation Analysis

Argumentation involves the interdisciplinary study of how conclusions can be reached in natural language. Here we use elements of the original model of argumentation explained in Toulmin (1958) and Toulmin et al. (1984). Toulmin's method has been advocated in a number of practical fields, including law and public sector auditing (e.g., see Barnes 1991).⁹

The Toulmin model avoids the extremes of absolutist and relativist reasoning in evaluating the worth of ideas: for example, by regarding cultural variations of rational arguments to be important. Toulmin recognizes “field-dependent” aspects of argumentation that are unique to the field where the argumentation is applied. This would extend to include the use of accounting concepts in accounting argumentation.

Some aspects of argumentation are field-variant and change with the disciplinary context. However, other aspects of argumentation are field-invariant and are largely independent of the particular field. These include such things as deductive versus inductive argumentation, argument structure, reasoning by sign, reasoning by analogy, and other aspects of the logic of the argumentation. Toulmin's view was that good argumentation should be able to withstand criticism and should be regarded as a form of competition in which ideas survive and evolve based on the arguments that support them.¹⁰

The relevance of an argumentation approach is illustrated by the fact that virtually all published research in the field of accounting involves argumentation to convince the reader of a particular conclusion or finding. By focusing on the field of accounting and field-dependent aspects of argumentation, we are using a context-bound theorizing approach. With field-dependent accounting argumentation, the detection of lying through accounting will not always be a dichotomous “yes” or “no” issue. There can be different degrees of lying or half-truths about future events because accounting estimates fall within a distribution of estimates. To use a point estimate to record a number for such an estimate in the financial statements carries different degrees of risk of material misstatement, depending on the point chosen (Brydon 2019, 77). For this reason, degrees of truthfulness are more consistent with current accounting estimates than they are with assuming that absolute truth or falsity applies in material misstatements. A continuum of truth seems to be a very practical way to deal with half-truths.

The concept of degrees of accounting truthfulness is also consistent with the burden of proof concept in civil cases in commercial law, where the “preponderance of evidence” rule applies. In civil cases in the United Kingdom, this is described as “the balance of probabilities” and in the United States as “more probable than not.” In both countries, the civil standard is met if there is a greater than 50% chance that the proposition is true. We draw on our subsequent analysis of the Enron trial evidence to propose that similar criteria of truthfulness be used to decide the truthfulness of an accounting estimate in GAAP-based financial reporting.

We define ethical accounting as being accounting that is 100% truthful about known material facts and at least 50% truthful about future material events that are the sources of the various types of estimation uncertainty outlined by the IASB (2018, para. 2.22, 6.60–6.61). For example, ethical accounting for the allowance for doubtful accounts could mean that there should be at least 0.50 probability (50% confidence) that there is no material misstatement in the account based on the available evidence at the time of the audit report. An example of this type of logic is reflected in Barker and Penman's (2020, 332) implementation of a matching principle for IFRS. There is nothing preventing an auditor/manager from using more demanding standards of truthfulness, and some may contend that the balance sheet should be ordered by decreasing levels of truthfulness (e.g., cash should be 100% truthful, while goodwill is 50%). Such principles of truthfulness for various accounts also apply to omissions of material facts or omissions of probable material future events, as well as to recorded amounts. Systems to support such reasoning should be required through a revised CF of accounting and/or through revised auditing standards that specify the types of information that are capable of being audited.

Constitutions of many types follow a top-down logic of hierarchical reasoning (Chambers 1996). They invoke such concepts as natural law (rules of nature) and social law (rules of society). National constitutions can be codified, starting with a preamble (objectives) and then basic principles followed by rules for changes and amendments. Such an accounting/auditing constitution could help to deter abuses in the governance of accounting reasoning in practice and in litigation.

The Enron trial is an example of where compliance did not result in fair presentation.¹¹ Yet no accounting or auditing authority (such as the FASB) has contradicted the validity of the accounting expert witness evidence presented. The legitimacy of the accounting argumentation remains unchallenged. Standard setters have not addressed the vexing accounting issues that arose. Their failure to do so has contributed to continuing controversy, including the call for a new audit profession to monitor increasingly questionable financial reporting (e.g., see Brydon 2019).

Our recommendations for the CF indicate how the field-dependent aspects of accounting argumentation could be improved to delegitimize the types of accounting arguments presented at the Enron trial. We disagree with the notion that high accounting risk estimates reflect a legitimate social construction of fair presentation with GAAP. Rather, Toulmin-type argumentation indicates the desirability of the CF acting as the major premise or source of authority in accounting argumentation. Combining this major premise with the requirement to hold accounting risk in the existing CF to acceptable levels would have prevented the accounting expert witnesses in the Enron trial from arguing that high-risk estimates were legitimate.

Concepts Used to Analyze the Court Argumentation: Warrants, Qualifiers, Data, and Conclusions

Toulmin's (1958) theory of argumentation includes the concepts of data, warrants, qualifiers, and conclusions. These concepts, explained below, are described too in the general model of logical argumentation in auditing and accounting outlined by Barnes (1991). Data, warrants, and conclusions are considered to be the essential components. They are used explicitly or implicitly in every practical argument. Qualifiers may not be needed in every setting. Toulmin's approach has been used widely in many fields, including in management (Hitchcock and Verheij 2005; Hursti 2011) and in legal jurisprudence (Twining 1990; Anderson and Twining 1998; Goldring 2001). Collectively, warrants, qualifiers, and data should result in cogent and persuasive accounting arguments based on the evidence available to the preparers and auditors of financial statements (Vorobej 2006, 49).

In this paper we analyze the importance of warrants, qualifiers, data, and conclusions (described immediately below) in logically assessing whether Enron's financial reports were fairly presented prior to Enron filing for bankruptcy protection in December 2001. Additionally, we provide fuller understanding of how rhetorical concepts such as logos (logic), pathos (emotional quality), and ethos (arguer's perceived character) were invoked in arguments about whether Enron's accounting conformed to GAAP. Ideally, argumentation in the trial should have relied on logos to organize thoughts in support of a conclusion.

Warrants explain the connection between data and conclusion. They are the major premises of an argument. They include objectives, concepts, principles, theories, models, assumptions, and definitions. A common warrant in accounting is the assumption that assets, liabilities, and equities can be expressed in currency values. The most important warrants or major premises in accounting reasoning are the objectives of financial reporting. They determine the ultimate purpose of the reporting. All other elements of argumentation should support this purpose.¹²

Analysis of the accounting expert witness evidence leads us to propose that the set of warrants in accounting should include the objectives of financial reporting and the related concepts and principles needed to attain those objectives. A key principle in meeting the objectives should be to control the accounting risk involved in measuring assets and liabilities to an acceptable level. By the term accounting risk, we mean the aspect of estimation uncertainty that relates to the reasonableness of management assumptions and judgments. Specifically, in the context of reporting on assets/liabilities, we regard accounting risk to be the probability of a material difference arising between what is recorded in the financial statements as the monetary equivalence of an asset/liability, and what is realized (obtained/disbursed in cash or cash-equivalent proceeds) for the asset/liability in the future, based upon the prudent application of knowledge at the recording date. This concept can be modified to distinguish between intentional and unintentional accounting risk based on the acceptable risk level (e.g., see Smieliauskas 2008).

Thus, we tie the economic substance of future events to their riskiness of being misrepresented materially by an accounting estimate. This is an approach used by economists such as Ben-David et al. (2013) and Glaser et al. (2013) when dealing with reasonable ranges about future events of the type considered by auditing standards such as ISA/CAS 540 and by IASB accounting concepts (IASB 2018, para. 2.30). Accounting risk should be a key consideration in fair value accounting and other accounting estimates that make assumptions about the future.¹³ Adoption of an acceptable level of accounting risk should help provide accounting estimates that present fairly. This would operate in a way similar to the notion of acceptable (reasonable) audit risk that is used in auditing standards to determine whether sufficient appropriate audit evidence has been gathered.¹⁴

In legal reasoning in court judgments, warrants are the general decision principle and the driving force of court logic (Goldring 2001, 63; Walton 2006). The principles-based reasoning in judgments must have a general applicability that goes beyond a particular case. Application of the same general reason (warrant) across like cases has the desirable property of judicial fairness by treating like cases alike (Goldring 2001, 64).

Originally, the basis for the FASB's rationale for its CF was a hierarchy of warrants in GAAP. At the apex of the hierarchy was the most important reason (or warrant)—that is, achieving the objectives of financial reporting. Below this were concepts and principles that would help to achieve the objectives. Then at the bottom were detailed rules of specific accounting standards that provided further guidance. These were to be consistent with the overall framework in more specific economic contexts. This reasoning system is mirrored to a considerable degree in the current CF of the IASB (2018). However, the individual standards are not subordinate to the IASB CF principles (IASB 2018, para. SP1.2–1.4), thus preventing IFRS (or FASB standards) from being a coherent system of accounting reasoning that is principles-based, as noted in Sutton et al. (2015). Also see Dennis (2018) for more discussion.

In contrast to CFs such as the FASB's and IASB's (2018), it is possible to have a principles-based reasoning system such as developed by the ICAS (2006). Any conflict between the objectives of a CF and a rule in a principles-based reasoning system should result in the CF overriding the rule. Such overriding is necessary to ensure that the objectives of financial reporting are met. The intent of the FASB CF was to guide reasoning in standard setting and rule-making and to provide general practical guidance when there was no specific standard. The CF was supposed to embrace reasoning, to incorporate principles from experience, and to help generate new ideas that would address future needs (Storey and Storey 1998, 41–43). The FASB's CF was intended to create additional hierarchies of warrants to help determine which warrant took precedence when there was conflict among warrants. Importantly, the FASB made it clear that definitions of basic concepts in accounting should follow from the prime objectives of financial reporting.

The above premises focus on accounting reasoning because that was the issue at the Enron trial and is the focus of our analysis here. In practice, there are other standards that need to be followed by professional accountants—specifically, professional ethics and auditing standards. Each of these has its own hierarchy of warrants such as CFs and more detailed standards guidance. For example, there is the code of professional conduct that has objectives, principles, and concepts as well as more specific standards on conduct; IAASB has a CF on financial statement audits in ISA 200 as well as CFs for other assurance engagements in International Standard on Assurance Engagements (ISAE) ISAEs 3000 and 3001, and more detailed guidance on auditing and assurance in the rest of the ISAs and ISAEs for audit and assurance, respectively. All of the CFs for these are organized in the same way, with objectives first, followed by concepts and principles, followed by more detailed guidance. The big difference for audit and professional ethics is that their CFs are to be followed by practitioners as well as by standard setters. Because of this, ICAS (2006) principles-based reasoning proposals are now largely being followed by professional ethics and financial statement audit standards, with accounting standards being a somewhat unusual exception. As is illustrated in the testimony here, strictly following the detailed standards in all situations can lead to the fraudulent reporting seen in Enron.

At its most general, the hierarchy of warrants in professional accounting argumentation would be as follows: level 1—meeting the public interest and related guidance from professional ethics; level 2—the CF of financial accounting and related guidance by IFRS; and level 3—the CF of financial statement auditing and related guidance in ISAs. Our focus of argumentation analysis is on the level 2 warrants dealing with fair presentation versus compliance financial reporting issues. Ideally, practicing auditors should be dealing with all three levels of argumentation in supporting their opinions and providing explanations for their reasoning in audit files.

With the above background, it should be clearer that the role of a CF in accounting should be to seek to meet the public interest through following professional ethics and provide information for decision making and evaluating management stewardship. The resulting accounting information should be filtered by the verifiability requirements specified by audit standards. Our focus in this paper is on the effect that coherent principles-based reasoning with accounting standards could have had on the accounting argumentation at the Enron trial.

Qualifiers are the constraints on warrants. They clarify situations in which a general warrant does not apply. Qualifiers are exceptions to the general principles represented by the warrants. An important qualifier in financial reporting is that although GAAP are the most common benchmark for evaluating financial reporting, GAAP do not always result in fair presentation. Explicit qualifiers such as this help to strengthen an argument.

Care is needed in developing principles (warrants) so that they are not converted into rules by allowing many exceptions (qualifiers) to the principles (Schipper 2003). Frequently, qualifiers in accounting argumentation arise when major warrants of accounting and financial reporting (such as the going concern assumption) have a sufficiently high risk of being violated. Use of the “going concern” warrant of financial reporting helps to justify the valuation of assets at their historical net acquisition cost (and not at their selling price) on the grounds that the entity is not contemplating liquidating its capital assets. If this warrant is questionable in a particular circumstance, then a different basis of accounting (other than historical cost) may be needed. Justification for valuing assets at their selling price (a net realizable value or liquidation basis of accounting) arises from violating the qualifier that a business is a going concern.

Data are the evidence of accounting practices and the circumstances of their application. They are the minor premises of an argument. Data depend on warrants (major premises) to determine their relevance in reaching a conclusion about the reasonableness of accounting. Provision of data (in the form of sufficient appropriate evidence to support the truthfulness of future realizable values) is a key condition of the accounting knowledge that should be used as a basis for financial reporting.

Conclusions state the claim of a logical argument. They are strengthened by supporting data, acceptable major premises (warrants), and acceptable minor premises (data). Logically, warrants dominate argumentation because they determine which data are relevant to the conclusion. Usually, it is easier to follow the logic of an argument when it is stated in the following sequence: Warrants → Qualifiers → Data → Conclusion. Such reasoning helps assure that preceding statements (premises) support the conclusion of the argument sufficiently. If the premises are true (or at least highly likely to be true) then the conclusion is more likely to be true, too. Reasoning of this type should be the basis of any accounting that is geared to meet the objectives of financial reporting. A prerequisite for issuing fairly presented GAAP financial statements should be acceptance of the dominant warrant that accounting must meet the objectives of financial reporting.

Legal Argument

A CF for financial reporting should help courts to assess whether accounting estimates of future realizable values of assets are faithfully represented. Court evidence presented by an expert witness usually contains a strong appeal to the authority or credibility (ethos) of the expert's professional reputation. Quite often too much emphasis is put on ethos at the expense of the logic or reasoning (logos). Ideally, the evidence of an expert witness should appeal extensively to logos, and much less to ethos or pathos (emotions). Otherwise, it risks becoming “emotional, imprecise and open to interpretation” (Norreklit 2003, 595). Because expert witness arguments usually draw strength from the credibility of the provider, much trial questioning focuses on enhancing or attacking the ethos of the expert witness. An expert witness risks losing credibility by invoking bad arguments that involve poor logos. Courtroom argumentation makes use of narrative elements that are reflected by the rhetoric used in the argumentation. The testimony needs to be analyzed to identify the key premises in the trial argumentation.

The Enron trial transcripts highlight important warrants that supported the opinion of the two accounting experts. We do not leave these warrants as implicit enthymemes,¹⁵ contrary to what occurs in court-based argumentation. Enthymemes arise because it is impossible to specify every aspect of the universe that is assumed in making an argument (Walton 2001). In formal and everyday informal interchanges, shared conventions and values are often used without making them explicit or advising participants of them. Any CF in financial reporting should acknowledge its reliance on such shared conventions and values and justify the goals and concepts arising from them (Bromwich et al. 2010). Crucially, at the Enron trial, the objectives of financial reporting were left as enthymemes. This helped disguise the flawed accounting logic of the defense's expert witnesses.

Underpinning Presumptions

We make two presumptions. The first is about the role of a CF. We do not dispute Hines's (1991, 313–314) premise that “the meaning and significance of CF projects is not so much functional and technical, but rather social and cultural” and that CF projects are undertaken as “a strategic manoeuvre for providing legitimacy to standard-setting boards and the accounting profession during periods of competition or threatened government intervention” (Hines 1989, 89). Rather, from an argumentation perspective, we maintain that ad hoc warrants based on political/power considerations will lead to financial reporting that lacks cogent normative guidance. Thus, warrants should meet user needs and go beyond narrow political interests.

If fair presentation means capturing economic substance, engaging in ethical reporting, and meeting stated objectives, then there can be differences between compliance reporting and fair presentation reporting, depending on the circumstances. Fair presentation reporting is more sensitive to the specific context of the reporting.

Why Enron?

“Enron” is a landmark business, economic, ethical, and regulatory case that can fruitfully be explored to help understand the potential for markets and organizations to be destroyed unless principles-based ways of conducting business are achieved. Enron is an exemplary case because it provides rich insights into continuing problems in financial accounting theory and practice, including the role of a CF and how to deal with accounting risk in financial reporting (e.g., Dichev 2017; Lev 2018; Brydon 2019). Benston (2006, 482–83) attributed the problematic accounting at Enron to nonverifiability of the accounting estimates. However, the real problem was the high risk associated with the accounting estimates. Although an auditor may be able to verify that an estimate is high-risk, if the financial reporting framework allows the high-risk estimate to be reported, then auditors can do little to deter its use, especially if a compliance reporting mentality is adopted. Our analysis of the court argumentation by the expert accounting witnesses supports this view.

What makes the Enron trial an exceptional case is the blatant way in which GAAP-based, compliance-focused accounting was used as a defense. The profession has not yet responded by proposing any new or revised standards or conceptual changes to address the poor legitimacy of the accounting argumentation of the expert witnesses. The profession has not acknowledged where the accounting expert witness testimony was wrong from an accounting perspective. The profession's failure to do so in field-specific terms of accounting concepts and standards is disconcerting because of the potential for the problems involved to be perpetuated.

The collapse of Enron in 2001 was a pivotal event affecting the accounting profession. It led to a criminal trial in 2006 of the company's CEO (Jeffrey Skilling) and chair (Ken Lay). Both were convicted in the US District Court (Southern District of Texas – Houston Division) on May 25, 2006, of conspiracy to commit securities fraud. These convictions arose from matters related to the preparation of Enron's published quarterly financial statements, issued before the company filed for bankruptcy protection in December 2001. At the trial, two prominent members of the American accounting profession, Jerry Arnold and Walter Rush, testified as expert witnesses for the defense. They gave evidence that Enron's accounting complied fully with US GAAP. We conduct a detailed analysis of the transcripts of their expert witness testimony in Appendix 2.¹⁶ An overview of this analysis is presented in section 4.

The expert witness testimony has not been denounced by the accounting profession or financial market regulators. Instead, the accounting profession has limited itself to criticizing some relatively minor rule violations that were not mentioned at the trial. The testimony presented raises important issues about the acceptability of applying a “tick box” mentality in accounting in all situations.¹⁷ The continuing failure of accounting standard setters to disassociate themselves from the accounting argumentation of the prominent accounting expert witnesses at the Enron trial is disturbing. Such failure has contributed to controversy about the auditor's role in evaluating financial reporting (Defond et al. 2018; Palmrose and Kinney 2018). Specifically, compliance with GAAP can be used to cover up lying by management. Enron is unique in that the prosecuting attorney published an article outlining his legal strategy in order to get a criminal conviction (Hueston 2007). We are not aware of similar legal insights from other accounting trials.

In the following analysis of accounting-related issues at the trial, we highlight the uncertainties of accounting estimates of the realizable value of assets made in financial reports. The evidence of the accounting expert witnesses reveals the extremes to which accounting reasoning can be taken in providing such estimates and how such reasoning can justify misleading and unethical financial reporting.

Fundamental Objectives of Financial Reporting

According to the accounting profession's prescriptive literature, financial reporting has dual fundamental objectives. These are: first, to provide information useful for making decisions about the reporting firm, and second, to provide information to help achieve accountability of company management through stewardship (FASB 2010, OB 2, OB 4; IASB 2018, para. 1.3). Such objectives serve a social role because they provide seemingly ethical, normative boundaries for financial reporting. Nonetheless, how to make these objectives operate in practice continues to be a vexing issue.

Neither of these objectives of financial reporting was met at Enron, despite expert accounting defense witness testimony that the accounting fully conformed with GAAP. Part of the problem is that GAAP encourages accountants to give priority to the authority of detailed guidance (rules) rather than to strive to attain the objectives of financial reporting. The latter are specified in principles that are less detailed and more vague than detailed rules.

A moral compass would have been needed by Enron management to prevent any lying in its financial reports (Garmann Johnsen 2018). Nonetheless, when accounting expert witnesses publicly defend lies in financial reporting and use accounting-based argument to do so, public analysis of such argument is warranted. Such analysis is especially important now because of the emphasis being given to implementing governance arrangements that are intended to prevent unethical reporting (Bishop 2013) and because of increasing evidence that financial accounting is becoming less relevant (Lev and Gu 2016). In our analysis of the accounting expert witness evidence, we illustrate how ethical reasoning was compromised by management and accountants and how flawed, yet acceptable, accounting arguments were implicated in allowing this to happen.

The Conceptual Framework and the Trial Context

At the time of the Enron trial, accounting and financial reporting rules and practices in the United States were guided by a nonbinding CF for financial reporting. This had been developed largely between 1978 and 1985 by the US FASB (Zeff 1999). However, due to regulatory requirements in the United States, the FASB's CF was placed at the bottom of the hierarchy of professional authority in accounting (Palmrose 2009, 290), meaning that the CF had lesser authority than all the sources above it. (For further information regarding the US GAAP hierarchy, see Appendix 1.) Similar reasoning is suggested in the recently revised CF of the IASB (2018, SP1.1–1.2).

The CF of financial reporting is supposed to guide accounting standard setters in developing more detailed standards. A critical part of the CF, the overall stated objectives of financial reporting, are situated at the pinnacle of the framework. Although the overall objectives have not changed much over the years, the detailed accounting standards have changed. The objectives of financial reporting should have been a major focus of the Enron trial. However, the accounting expert witnesses argued narrowly that only conformity to detailed accounting rules mattered. A mechanistic “compliance with rules” mentality dominated their evidence. They did not address whether the overall objectives of financial reporting were likely to be achieved. Their stance condoned unethical reporting to the point of lying. The trial transcripts support the view that the existing system of accounting standards can encourage stretching the interpretation of standards to the point of conflicting with fundamental objectives of financial reporting (see Appendix 2).

The summaries of evidence provided in Appendix 2 are faithful representations of the expert witnesses' testimonies and the prosecutors' points of view. They provide a reliable source from which to draw conclusions regarding the trial testimony. The summaries presented are consistent with the summaries of the expert witnesses' opinions in the trial transcripts (May 2, 91, for Arnold; May 3, 70, for Rush). They are also consistent with the basic reasoning framework that is used extensively in legal literature (involving analysis of arguments in terms of warrants, qualifiers, data, and conclusion). To minimize misinterpretation, we use extensive direct quotes from the trial transcript and give detailed references to the testimony. Our conclusions are consistent with the prosecutor's view, as explained independently by him (Hueston 2007).

Legal Strategies in a Criminal Trial: Accounting Standards as Legal Defense

Although Enron's financial reporting is widely regarded to have been misleading, it has also been deemed to conform with GAAP (Haldeman 2006). This paradox was evident to the prosecution at the Enron trial, compelling it to not to focus on “proofs of reserve manipulations, asset overvaluation schemes, complicated and misleadingly disclosed end-of-quarter transactions . . . and other accounting frauds” (Hueston 2007, 206). The prosecutor was concerned that inclusion of such matters would lead to a complex “battle between experts regarding the propriety of a transaction under governing accounting rules . . . [with the attendant risk of] . . . presenting a diluted message and losing the jury for much of the trial” (Hueston 2007, 206). The prosecution decided “the winning way was to directly confront the weaknesses of the case—defining the ‘crime’ and conduct directly involving the defendants themselves—and to convert it into a clear trial narrative” (Hueston 2007, 207). The guilty verdicts obtained were not in respect of crimes that included fraudulent violation of GAAP in financial reporting.

By focusing directly on the lies the two defendants were alleged to have made in private and public information that was not included in the financial statements, the accounting issues became tangential to the prosecution's case. The prosecution decided not to mention accounting issues. However, ironically, to parry accusations against the defendants of lying, the defense used accounting standards to show that there was no lying with respect to Enron's (alleged) true financial situation. This raises two important questions: how did the defendants publicly reason their actions in accounting terms? To what extent was such reasoning justified?

US court practice encourages expert witnesses to seek the sanctuary of rules while engaging in “information-seeking dialogue” (Walton 2006, 746). Although reliance on such a sanctuary might assist in winning a legal battle by hiding behind GAAP, it risks losing the war in terms of meeting the broad needs of financial statement users (Craig et al. 2014). Neither of the two expert accounting witnesses criticized Enron's accounting. Greater consideration should have been given to whether Enron's accounting estimates were deceptive. Such ignorance of the critical importance of providing reliable accounting estimates is a type of “ethical blindness” in accounting (Palazzo et al. 2012).

Expert Witnesses

Arnold was a well-known accounting academic at the University of Southern California's Leventhal School of Accounting. He informed the court that he founded the “SEC and Financial Reporting Institute” and was involved extensively in consulting for the SEC and major accounting firms (trial transcript, May 2, 197–98).¹⁸ Rush stressed his experience as a former audit partner at PricewaterhouseCoopers, as a technical consultant on reporting issues, and as a consultant for the SEC and the federal government (May 3, 70–75).

Although the prosecution argued that the trial was not about accounting, nonetheless accounting became an issue because the Enron defendants decided to make it an issue. The defense case was based on the accounting expert witnesses' testimony: in particular, that because Enron's financial reporting complied with GAAP, lying did not take place. Thus, mere compliance with accounting rules was used to argue that the financial reporting information was not misleading. However, as Fastow (2016) claims, compliance can have fraudulent outcomes, despite adherence to professionally ordained accounting rules and standards. Rules may not be applicable to all situations.

Applying the Toulmin Framework to Accounting Expert Witness Testimony

Through repeated close readings of the trial transcripts of the testimonies of Arnold and Rush, and using Toulmin's (1958) framework, we have analyzed five major accounting issues raised in the trial. These five issues were sufficiently significant to prompt the defense team to explore them in detail and to have their two accounting expert witnesses address them. This formed part of the defense case that Lay and Skilling were not misrepresenting the true state of Enron's financial affairs. Our detailed evaluation of the expert witness testimony explores whether Enron's accounting technically conformed with GAAP and whether the accounting and financial reports “presented fairly.” This detailed exploration is provided in Appendix 2, with an overview summary of those results provided in section 4.

Accounting-Related Trial Argument

The trial illustrated that if the fair presentation objectives of financial reporting are to be met, then an appropriate CF should have authoritative status over detailed accounting standards and rules. What is needed is a hierarchical system of top-down reasoning where any conflict between detailed rules and any other authoritative guidance is resolved in favor of the basic principles and objectives of the CF for financial reporting, similar to what is required in IFAC's professional ethics (IFAC 2018a; 2018b, para. 100.3A2).

Despite a pejorative description of Enron's accounting as “unreasonable” or “high risk” (Benston 2006; Knapp 2006), Arnold and Rush were never asked to address the riskiness of Enron's accounting estimates. They argued strongly that Enron's accounting conformed to GAAP. Even if their argument was true, and Enron's accounting technically conformed with GAAP, a question arises as to whether GAAP is a necessary but not sufficient condition for fair presentation (Alexander and Archer 2003). The court should have considered whether Enron's accounting was presented fairly: that is, were the objectives of financial reporting, as stated in the CF, realized by the financial reporting?

We concur with the expert witnesses that Enron's accounting can be considered to conform materially to US GAAP (as then conceived). However, we do not agree that Enron's accounting constituted fair presentation. Thus, it represents Outcome B in the matrix presented earlier. At a minimum, it misled users because it did not meet the objectives of financial reporting. Specifically, the accounting risks for Enron were too high to be considered acceptable or truthful about future outcomes. To render them acceptable, the reported estimates should have been adjusted to make the reported numbers more reliable. Part of the problem was caused by high-risk accounting estimates being allowed by GAAP.

Rules or Principles?

Rather than focus on the actual intentions of the defendants, Arnold and Rush dwelt on demonstrating technical conformity with accounting rules. However, the accounting estimates they cited had too much accounting risk given Enron's economic context. Nonetheless, this seemed the best defense strategy in view of the commonly alleged bias in the US regulatory system in favor of rules over principles. Such a strategy is consistent with the observation that evidence of compliance with rules-based GAAP has been persuasive in many US court cases in which improper reporting is alleged (Ball 2009, 306). Such persuasiveness is mildly surprising given argument that a rules-based system encourages misleading financial reporting (Chambers and Wolnizer 1991, 362–63). In contrast, a well-developed principles-based system seems more likely to satisfy users' reporting needs. Such a system will not mislead users because it does not allow financial statements to report extremely risky estimates that are unlikely to be realized.

A key accounting issue that should have arisen, but did not, was whether high-risk estimates should be permitted by GAAP. It did not, because the prosecution was keener to attack the character (the credibility or ethos) of the defendants, using premises not connected with accounting reasoning (Hueston 2007, 207). The prosecution did not want to get bogged down in arcane technical details of accounting rules and confuse the jury.

Conformity with GAAP: Rules Versus Principles

The expert accounting witnesses argued that Enron's accounting conformed to GAAP. Yet the defendants did not ask their accounting expert witnesses to testify about any specific special purpose entity (SPE) transactions. These had been the focus of much critical commentary. Nor were the witnesses pressed on such matters by the prosecution. Some of Enron's SPE transactions were clear violations of GAAP rules (Benston and Hartgraves 2002, 109, 113; Knapp 2006, 15). This helps to appreciate why Skilling and Lay and their lawyers and expert witnesses did not focus on these issues. The prosecution did not do so because it believed jurors would be confused by accounting rules if they were asked to consider the characteristics of misleading, fair, or unreasonable financial reporting. The prosecution focused instead (implicitly) on the objectives of financial reporting.

The prosecution's attack on the expert witness testimony was compromised by a GAAP hierarchy in which the objectives of financial reporting were ranked last. The prosecution's task would have been facilitated by a more appropriate GAAP hierarchy—one in which failure to adhere to principles would have helped to evaluate the ethos of the defendants. Since the prosecutor did not want to get involved in “disputes over the defendants' respective understandings of the application of often arcane accounting rules” (Hueston 2007, 1978), he de-emphasized any exploration of whether the financial reporting of Enron's management conformed with GAAP. The prosecutor took a different route to disprove the conclusion (Enron's management was lying) by trying to undermine the credibility of the expert witnesses. He questioned their motives (e.g., how much were they paid for their testimony?) and the reliability of their evidence (e.g., did they attempt to corroborate the defense claims with their own independent analysis?).

The prosecutor's accounting-related argumentation would have been facilitated greatly had an appropriate CF been recognized as the most authoritative source of accounting reasoning. The GAAP hierarchy needs to be changed to help deter fraudulent or unethical financial reporting. The objectives of financial reporting in meeting user needs (including the need to represent future events faithfully) should be paramount. When combined with the concepts of risk and materiality, this means that the accounting risk of estimates in a financial report should be at acceptable levels.¹⁹ If the objectives and related concepts and principles inherent in the CF were located at the top of the authoritative GAAP hierarchy, rather than at the bottom, this would result in a more coherent system of justification based on meeting user needs. Such elevation would be easier to defend logically in court disputes about financial reporting.

Although the testimony of the accounting expert witnesses was logically consistent with (then existing) GAAP, their arguments failed to persuade the jury. The authority of the experts was undermined by their inability to argue convincingly that fair presentation ensued and by the prosecution's interrogation of their credibility and impartiality. In terms of persuading the jury, the logic of the defense case of conformity with GAAP was overwhelmed and ineffective.