International Financial Statement Analysis

CHAPTER 17

EVALUATING FINANCIAL REPORTING QUALITY

Scott Richardson Barclays Global Investors San Francisco, California

 

İrem Tuna The Wharton School University of Pennsylvania Philadelphia, Pennsylvania

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Contrast accrual accounting and cash accounting and explain why accounting discretion exists in an accrual accounting system.

• Describe the relationship between the level of accruals and the persistence of earnings, and the relative multiples which the cash and accrual components of earnings should rationally receive in valuation.

• List and explain the opportunities and motivations for management to intervene in the external financial reporting process, and the mechanisms that discipline such intervention.

• Discuss earnings quality, explain simple measures of earnings quality, and compare and contrast the earnings quality of peer companies.

• Explain mean reversion in earnings and the expected relations between the speed of mean reversion and the accruals component of earnings.

• Identify and explain problems in financial reporting related to revenue recognition, expense recognition, the reporting of assets and liabilities, and the cash flow statement.

• Explain and interpret warning signs of potential problems in each of the major areas of financial reporting (i.e., revenue, expenses, assets, liabilities, and cash flow) and warning signs of overall vulnerability to financial reporting problems. ...