Accounting for Uncertainty

Abstract

The recent crisis of confidence in the accounting industry has raised issues about the need for reform. In one area the timing and technology are right today for significantly different accounting rules—particularly rules that govern the treatment of uncertainty in financial statements. Discussed here are some basic misconceptions about uncertainty that are actually sanctioned by current accounting practice. A variety of analytical tools are available to improve representation of uncertainty for firms. The authors address some of the legal consequences of relying on accepted but flawed accounting standards, and point to a possible path to reform of accounting practice.