Analysis of Financial Statements, 3rd Edition

CHAPTER 10

The Lessons We Learn

Financial analysis involves gathering the information about a company, its industry, and the economy, and developing an evaluation of the company's future financial condition and operating performance. The financial scandals and crises since the 1990s have increased the awareness of the need for more transparency in financial disclosures and better analysis of the available information.

Former Chairman of the Securities and Exchange Commission (SEC), Harvey Pitt, summed up this era in his testimony before the Committee on Financial Services, U.S. House of Representatives (March 20, 2002):

In recent years, corporate leaders have been under increasing pressure from the investment community, including individual investors, to meet elevated expectations. They also have been operating under a system that can misalign the incentives of investors and those of management. Our culture over the past decade has fostered a short-term perspective of corporate performance. Corporate leaders and directors have been rewarded for short-term performance, sometimes at the expense of long-term fundamental value. Investors have purchased stock not because they believed in the business or its strategy as an investment over the long-term, but simply under the assumption that stock prices would only go up.1

As a result of these problems, we have seen many new laws and regulations, including the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and ...