Volume 13, No. 13

Where Does It Hurt? Critical Accounting Policies In The S&P 500  For the past few years, companies have been required to address their critical accounting policies in the Management's Discussion & Analysis section of their annual SEC filings. It's not an eye-catching disclosure: it doesn't deal much with numbers, the lifeblood of most financial analysis. It is, however, an interesting bit of self-diagnosis. The SEC is essentially asking companies to describe the accounting policies and estimates that have the greatest impact on the financial statements. The disclosures should tell investors where accounting risk resides in the firm. Individually, the discussions run the gamut from mere compliance boilerplate to adding genuinely useful insights into a firm's workings. Collectively, the disclosures enable you to do some corporate mind-reading on the market as a whole. Tabulating the disclosures for the S&P 500 shows that the biggest corporate accounting risk is in the area of income taxes, followed closely by revenue recognition - and the tech sector has the highest concentration of critical accounting policies overall. Those concerns are straight from the horse's mouth, not from some talking head spouting his or her opinion of where accounting risks lie. It's information that helps an analysts or investor set their own worry and study priorities.