No it is not dead yet, but my old world of Accounting is taking a lot of hits.

A new book is coming out called The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance books). The premise, per an excerpt in the Wall Street Journal, is that accounting focuses on the past often using arcane rules and estimates. Historically, reported earnings contain a number of one time gains and losses for items like foreign currency or restructuring costs as well as estimates for useful lives of assets to depreciate or bad debt expense etc. And, of course, this is all true.

What the book’s authors are concerned about is that more forward looking information like new customers, new technology, capacity utilization or in retail, same-store sales, are not given the impact they deserve since these measures are often a better predictor of the future and thus a firm’s long term stock value. And, of course, this is all true.

The article brings up the idea that reported earnings (and especially losses) may make it hard to judge the real value of a firm. They cite Tesla who despite over a billion dollars in losses the last two years is considered, by some, as a great innovator and valuable firm. If you read my prior blog posting, you know how I feel about Elon Musk and his money losing, government subsidized businesses. But the point certainly could be valid for the early years of many tech startups like Facebook.

A separate Wall Street Journal article was titled, “Accounting Blurs Profit Picture”. The message here was that only about 6% of the Standard&Poor 500 firms exclusively use Generally Accepted Accounting Principles or GAAP to close their books. Theses firms include Home Depot and Apple, two very different companies and industries.

What most other public firms do is that besides reporting the required GAAP earnings information, they will separately report some other form of Cash Earnings which excludes a number of the one time charges mentioned above. This practice occurs in almost half of all published earnings reports. These firms are supposed to “reconcile” their GAAP results with their hybrid, customized results. The Securities Exchange Commission (SEC) is following up with eighty companies about if and how they accomplish this.

So, as an old CFO and CPA, where do I believe this is going and what should a typical investor do? To my old accounting profession, I would strongly suggest they find ways to either accommodate alternate earnings presentations or enforce the rules of GAAP even if it means adding some more forward looking, but meaningful, information. For the average investor, understanding financial statements has never been easy and now it is much harder. The key for an investor who is looking to invest in one of two companies like Home Depot or Lowes, is to spend more time reviewing their results to understand if you are comparing apples or oranges. In many cases, the security analysts who follow these firms may provide you the best information versus the firms’s own published reports.

Good lucking in sorting it all out and investing in a world where accounting is, if not dead, strongly abused!