Financial Analysts Need Sharper Accounting Tools

ABSTRACT

This paper explores the implications of a wealth accounting model on comparability for several key aspects of financial analysis such as restraining, accounting manipulation, and unifying merger and acquisition accounting. The paper extends the analysis of wealth accounting for individual companies to explore the implications for the capital markets at large, suggesting, for one thing, that wealth accounting financial statements would emit early warning signals of approaching financial crises. And, suggesting for another, that wealth accounting statements would serve as rolling stress tests to help the markets self- regulate, reducing the need for government regulation and at the same time helping regulators formulate more effective regulatory policies.

These proposals are revolutionary and would generate fierce opposition from the corporate financial reporting community. The paper explores the current political scene and concludes that the time may be ripe for a concerted effort to convince the Securities and Exchange Commission and the Financial Accounting Standards Board to elevate the interests of investors and creditors above the interests of corporate financial statement preparers that they now seem to favor, in fact if not by intent. The paper suggests that financial analysts and academic accountants should join forces to lead a reform effort.

David Mosso is retired. He was Vice Chairman of the Financial Accounting Standards Board, Chairman of the Federal Accounting Standards Advisory Board, and Fiscal Assistant Secretary of the United States Treasury.

Source : David Mosso (2011) Financial Analysts Need Sharper Accounting Tools. Accounting Horizons: June 2011, Vol. 25, No. 2, pp. 419-435.