Balance of Probabilities: Accounting

Have written previously about burdens of proof in accounting standards, and how the dominant burden of proof is balance of probabilities. Balance of probabilities means 51%, not 70% or 80%. It also means that there will be many occasions when auditors and management are arguing over whether the burden of proof has been met.

Recently had a student presentation involving accounting restatements at Hertz. Four areas of concern: (a) extent of depreciation claimed versus residual values of certain assets, (b) allowance for doubtful accounts in relation to a Brazilian subsidiary, (c) allowance for uncollectible amounts in relation to damaged vehicles and (d) restoration obligations at the end of vehicle lease terms.

Would seem, on the surface, very difficult to argue definitively one way or another, with respect to all categories.

Yet how this ends up reported in the media, such as CNBC:

Hertz said in March that during the quarter, it had identified errors totaling $46.3 million in prior periods.

…Hertz said on Friday its audit committee had concluded that financial statements for 2011 should no longer be relied upon and that adjustments might be needed for 2012 and 2013 results.

The company said the errors included the treatment of capitalization and depreciation for some non-fleet assets, renter obligations for damaged vehicles and restoration obligations at the end of leases.

Not simply a matter of judgement and some grey area, but rather an assertion by the corporate directors that the financial statements are no longer reliable.

When does one reach a point where no balance of probabilities is even close to being met, on the evidence before management?


About brucelarochelle
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