Analysis Of Bradshaw And Sloan 's An Efficient Corporate Financial Reporting

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

After a profit announcement was made by David Jones Ltd, it is the objective of this report to note whether there was an impact of such information on investor behaviour via the share prices of this company. To ensure that the information found was accurate, the effect of the All Ordinaries was taken into consideration and comparisons were made between David Jones and its two main competitors. After analysing the closing share prices before and after the date of the announcement, it was found that share prices reduced more than that of the general stock market and also more than that of its main competitors. This report concludes that the announcement of accounting information by

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

The most important role of financial reports is to effectively communicate financial information to outsiders in a timely and credible manner (FASB, 1984). Earnings are vital in financial statements because earnings represent the company’s value. Investors and creditors always look to

The most important thing to any company’s stakeholders is high-quality reporting of its financial statements. Investors, for instance, need to know the truth about a company in order to make an informed decision on whether to make private investment, buy stock or bonds. However, for stakeholders to get the truth about a company, they need to read and understand management’s discussion and analysis, the president’s letter, the notes, as well as the financial statements. Conversely, financial statements must be accompanied with disclosures to prevent them from misleading the stakeholders.

In today’s business environment where publicly traded companies feel pressure to meet short-term earnings expectations, management may be tempted to “manage earnings”. Assess how a financial statement user may be able to detect managed earnings when reviewing the firm’s balance sheet, income statement, and cash-flow statement. Indicate how a potential investor might interpret these “red-flags”. Provide support for your rationale.

The general accepted accounting principles (GAAP) numbers ensure a level of consistency but they do not take into consideration the particularities of each firm, or at least of each industry. Collins et al. (1997) observed a decline in the value relevance of GAAP earnings, since 1953, and even though research on non-GAAP numbers starts and focuses around the late 1990s, in 1973 the Securities and Exchange Commission (SEC) issued a warning for the non-GAAP measures (Accounting Series Release No 142, SEC 1973).

Baruch Lev and Feng Gu authors of “The End of Accounting and The Path Forward for Investors and Managers” indicate that over the past 110 years, the structure and content of financial reports has not changed, and that the role that these reports play in influencing the decisions of investors has greatly diminished. Lev and Gu make a case that non-transaction events that are not captured by the financial reports such as those disclosed through 8-k filings with the Securities and Exchange Commission (“SEC”) have a greater impact on stock prices, and thus more useful to investors. In addition, they suggest that one of reasons for the decline in usefulness of financial reports stems from the increase of estimates that has made its way into these reports (Lev and Gu 2016).

1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity?

Non-GAAP metrics can provide investors with extra information about the company, and can help communicate what earnings would have been had certain infrequent expenses not occurred during the accounting period. Non-GAAP metrics also creates risks and challenges for investors due its inherent risk given its susceptibility to management bias. Some of the risks include reduced comparability of companies within the same industry and altered investor perception of earnings trends in the market as a whole and for individual companies. The motive behind the increase in non-GAAP earnings is questionable and could be attributed to at least two distinct factors. The first factor is management's desire to provide investors with additional insight into the company, and to help investors identify core profitability by excluding certain infrequent expenses in the calculation of adjusted earnings. The second factor is related to the Internal Revenue Service (IRS) regulations involving executive compensation. According to (Balsam,

Several main reasons for the occurrence of earnings management include influencing the stock market, growing management compensation, decreasing the possibility of violating lending agreements, and averting government intervention. It is believed that managers might attempt to manage earnings because they believe reported earnings impact investor and creditor decisions. In most cases, earnings management techniques are designed to improve reported income effects and to lower the company’s capital cost. However, in order to increase future profits, management might take the chance to report more bad news in low performance

The relationship between published financial or accounting information and capital market is a complex one. The capital market is affected by analyst’s forecasts and expectations putting pressure on companies to adjust their reported earning numbers. Share prices are affected by the way corporate profits and balance sheet data

Moreover, securities analysts play the important roles of the users and providers of information and their sources of information include public information that all analysts know and private information that is possessed by individual analysts (Barron et al., 1998). Therefore, both the improvement of the transparency of listed companies ' public information and analysts ' private information can lead to an increase of the accuracy of analysts ' forecasts. Due to the lower costs of acquisition, the public information issued by the listed companies that act as the main sources of information of securities analysts is particularly important among them (Schipper, 1991), scholars ' research also focused on the correlation between the

There are different incentives to managements of firms to practice the phenomenon of earnings management. Most of these incentives are related to benchmarks of earnings. Sometimes, the previous period's performance may be the benchmark to the firm. In other cases, the benchmark to the firm may be the expectations of financial analysts. The promised compensations to the firm's management may be the most important incentive of the practice of earnings management. Benchmarks are necessary for the determination whether the management deserves or does not deserve the promised compensation.

Secondly, the claim made by ‘free market’ perspective to treat accounting information as other normal goods should be rejected because accounting information are unlike normal goods such as bread or house. It is a public good because the use of it by one investor does not prevent the usage of others (Hendriksen & Breda 1992, p.247). As non-investors have right to use the accounting information such as income statement and balance sheet as much as investors, investors will not agree to pay for the financial reports because others will become free-rider; thus, this prevent the function of normal pricing system of accounting information. As no income is received by producers of financial reports, they will not willing to produce it or will underproduce it so ‘free-market’ perspective is not applicable. Under this circumstance, Demski and Feltham (cited in Deegan 2009, p.65) states that for public good like accounting information, a more collective approach to its production is more desirable. This can be achieved by legislatively regulating the productions of accounting information so companies will produce the accounting information to meet the demands of external users and thus ensuring efficient capital market.