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

Chapter 5Investors' Fault or Accounting's?

In the preceding chapters, we documented the fast-diminishing relevance of financial report information to investors. But why blame accounting for that? Perhaps investors became increasingly less sophisticated or more irrational, subject to fads and hysteria, and therefore shunned the potentially useful accounting information? In this chapter, we accordingly apply a test of accounting usefulness that is detached from investors and capital markets. We put the spotlight on accounting itself. Given that the major use of reported earnings in investment analysis is to predict future company performance, we examine the accuracy of predicting future earnings from those previously reported and find a continuous erosion of accuracy, indicating a marked deterioration in the ability of reported earnings to predict corporate performance. Relevance lost once more.

Irrational Investors?

The previous chapters' evidence, showed the following: (i) Over the past 60 years, the role of corporate earnings, book values, and other key financial indicators in setting share prices diminished rapidly, and (ii) in terms of information timeliness, or relevance to investors' decisions, financial report information (not just earnings and book values) is increasingly preempted by more prompt and relevant information sources. When the financial reports are publicly released, their thunder is largely stolen.

While solidly based on large-scale empirical data, ...