Financials, Investors, and Bubbles

My wife's paper on Earnings Per Share manipulation is finished, and I wanted to share this brief section with you.

One of the basic objectives of accounting is to provide information that is useful to those making investment and credit decisions. However, underlying this objective is the assumption that these users will have a reasonable understanding of business and financial accounting. Here is where a potential problem arises. In a speech titled "State of Financial Reporting Today: An Unfinished Chapter III", given on June 21, 2001, Lynn Turner, the SEC chief accountant, noted that there were 84 million shareholders in 1998, which represented 44% of the U.S. adult population. This is a 21% increase from the 69 million shareholders in 1995 and a 61% increase from the 52 million shareholders in 1989. Turner also added that half of all stockholders have income of less than $57,000 and only 18% have income in excess of $100,000 (Hietger and Ballou, 2003).

I agree that something needs to be done about all these accounting misdeeds, and I don't think Sarbanes-Oxley was it. But nonetheless, I think it is true that part of the fault lies with investors and their advisors. Few people can distinguish between a balance sheet and an income statement. Even fewer have the knowledge to really dig in and understand what the numbers truly mean, yet in the late 90s, everybody was a trader. Sure Arthur Anderson and Enron are both guilty of wrongdoing, but those who invested in them should have understood what they were doing. There were bears all through the bubble, we just didn't listen to them.

It's like the current debate about expensing options. It doesn't really matter if they are expensed or not, as long as the basic information is there. A savvy investor will figure out what is going on.

UPDATE: Mrs. BP says check out this link for the speech.