Volume 12, No. 5

 

Ignorance Is Not Bliss: Critical Accounting Policies In The S&P 100  Throughout the Roaring Nineties, analysts and investors grew increasingly fixated on one, maybe two measures of a company's efforts: for established companies, earnings per share higher than last year's; for fledgling companies, some kind of pseudo-cash measure higher than last year's. That's it; the number was all that mattered. The collapse of Enron had to call into question the validity of an investment strategy so one-dimensional. Analysts covering that company had little in-depth knowledge of how the company purportedly ran its businesses, sometimes referring to it as a black box company. What they did know was that it always made or beat its number. In the end, that wasn't good enough. In Enron's aftermath, the SEC encouraged firms to report their critical accounting policies in the Management's Discussion &Analysis section of their 10-Ks. There's a lot of information in there: not just dreary verbiage about accounting methods, but the implicit statement by companies that these matters can have serious impacts on assets and earnings. Evaluating these disclosures doesn't yield an almighty number, but it provides qualitative information that should help analysts and investors understand just how much worry they're willing to endure. In this report, the critical accounting policies of the S&P 100 companies are examined.

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