Chapter 3. Intellectual Capital Reporting

THE LIMITATION OF FINANCIAL REPORTING

 

[O]ur current system—through its continual devotion to a traditional "reliability" standard—is actually producing less-reliable information, if viewed as the total picture.

 
 --—Steven Wallman, Former US Securities Exchange Commissioner[109]

Financial reports and statements are far from accurate in communicating the real value of the enterprise and its future performance potential. Companies that are publicly traded are valued by the market at multiples of their book value, sometimes as high as 20 times. Of course, a percentage of this market value can be attributed to market emotion and error. But when nearly 80 percent of corporate business assets are made of intellectual capital, and where financial reports report only on the 20 percent tangible assets, one starts to wonder about the accuracy and efficacy of these reports in reflecting the value of the enterprise and its future performance potential. Analysts, investors, CFOs, and accountants have all developed, in their own way, analytical tools and techniques to overcome its limitations. For internal management purposes, performance measures have played a major role in overcoming these limitations. Analysts developed analytical tools to value a company performance beyond financial results, taking into consideration factors like leadership, human resources, patents, brands, and specialized workforce. In addition, many companies, to reduce the amount ...

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