The End of Accounting and the Path Forward for Investors and Managers

Chapter 4Worse Than at First Sight

In which we apply a more sophisticated research methodology to examine the contribution of financial information to investors, focusing on the decision-relevant element of the information and comparing financial reports to alternative information sources available to investors. This accurate reading of financial information usefulness yields a highly surprising, or depressing, result: corporate quarterly and annual reports currently contribute only 5 to 6 percent (!) of the total information used by investors. What a loss for accounting’s relevance.

When Is a Message Informative?

A critic once commented on Richard Wagner's music: “It's not as bad as it sounds.” The reverse is true for the degree to which accounting has lost its relevance, as portrayed in Figure 3.1: The deterioration is actually worse than it looks. Figures 3.1 and 3.4 might give the impression that financial reports currently convey about 40 to 50 percent of the information used by investors—less than the 80 to 90 percent of a half century ago, to be sure, but still a respectable contribution. After all, in the 1960s and 1970s, financial reports were the only game in town as far as investors' information was concerned, whereas today, a large number of buy- and sell-side financial analysts and sophisticated online investor services provide substantial information for securities' valuation. Competition in the financial information market is fierce, and providing 40 to ...