Accounting for the Coronavirus

Law Journal Newletters: Accounting & Financial Planning for Law Firms, August 2020

In their article “Accounting for the Coronavirus,” published in the ALM’s Accounting and Financial Planning for Law Firms, Analysis Group Vice President John Drum and Manager Melissa Rutzen explore the particular challenges accountants face in the economic aftermath of the COVID-19 pandemic.

The authors start from the premise that, even in the best of times, accounting and financial reporting necessarily involve a considerable amount of subjectivity and judgment. They then note that, in the face of unprecedented economic, financial, and business challenges, many managers will be left to make highly subjective judgments without the benefit of past experience.

The authors cite examples of the types of subjective estimates that may prove to be especially troublesome, including those designed to avoid debt covenant violations, and they provide an overview of academic research that may be helpful in understanding accounting discretion in times of economic crises. They also comment on the risk of misinterpreting good faith accounting judgments as manipulative in hindsight.

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Authors

Drum J, Rutzen M