Reading Financial Reports For Dummies, 3rd Edition

Introduction

When I open an annual financial report today, one of the first questions I ask myself is, “Can I believe the numbers I'm seeing?” I never used to think that way. I used to think that any corporate financial report audited by a certified public accountant truly was prepared with the public's interests in mind.

The financial scandals of the late 1990s and early 2000s destroyed my confidence in those numbers, as they did for millions of other U.S. investors who lost billions in the stock market crash that followed those scandals. Sure, a stock bubble (a period of rising stock prices that stems from a buying frenzy) had burst, but financial reports that hid companies’ financial problems fueled the bubble and helped companies put on a bright, smiling face for the public. After these financial reporting scandals came to light, more than 500 public companies had to restate their earnings. Yet in almost a repeat of the scandals, the mortgage mess of 2007 showed how financial institutions were still using the same tricks of keeping key financial information off the books to hide financial troubles.

I still wonder what government regulators and public accountants were thinking and doing during these fiascos. How did the system break down so dramatically and so quickly? Although a few voices raised red flags, their pleas were drowned out by the euphoria of the building stock market bubble of the early 1990s and the housing market bubble of the mid-2000s.

These financial scandals ...