The Primacy of Fair Presentation: Evidence from PCAOB Standards, Federal Legislation, and the Courts

Abstract

SYNOPSIS Palmrose and Kinney (2018; hereafter PK) claim that technical compliance with GAAP is sufficient to justify an unqualified audit opinion. We disagree. PK's view ignores “fair presentation,” a concept equivalent to “faithful representation.” Their “technical compliance” view portrays GAAP as a set of black and white rules and auditing as a box-checking exercise, contradicting guidance from the SEC, FASB, IASB, PCAOB, and the courts. We show that the compliance mindset advocated by PK is responsible for many audit failures, including Enron, WorldCom, and Lehman Brothers. PK's view has long been used by auditing firms and their expert witnesses in (unsuccessful) attempts to avoid legal liability. Unfortunately, it is also a view that has greatly damaged the credibility of the auditing profession.