It was reported in the Financial Times on 28 October that accountants are warning that the introduction of international accounting rules will increase the risk of companies embellishing their financial results to flatter their financial performance.

A report just published by the Institute as reported on its website http://www.icaew.co.uk warns that the threat of aggressive earnings management to UK corporate reporting is still with us and is likely to increase with the introduction of International Financial Reporting Standards (IFRS).

‘"Aggressive earnings management' refers to using accounting policies and stretching judgements of what is acceptable to present corporate performance in a more favourable light than the underlying reality. The survey of anonymous interviews with audit partners, finance directors, audit committee chairmen, investment analysts and senior financial journalists found that aggressive earnings management, while perceived as less of a threat than in 2001, ‘will always be with us'.

Interviewees feared the threat would increase if the economic climate moved towards recession or if the current post-Enron vigilance falters. Almost all believe there are two key motivating factors giving rise to the threat of manipulation of figures – the need to meet or exceed market expectations and the gearing of director and management income to results.

There are many graphics on the website http://www.metaphorbusinessgraphics.com in the Financial Reporting section,depicting the introduction of the new rules.

A number of suggestions came out of the survey. These include:

· Increase awareness throughout the business community of the vulnerability of corporate reporting to manipulation through the introduction of IFRS

· All companies implement an active investor communications programme to ensure markets are properly informed, to reduce the scope for misunderstanding and the pressure to meet expectations

· Closer monitoring of the link between executive rewards and financial performance by the remuneration committees

Clearly the investment community will need to be on alert for companies seeking to embellish their financial results in the coming year.