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The accounting rules (GAAP) have only a loose correlation to how most modern large companies actually operate the levers of their businesses. Management teams

by pmarca 13y ago

The accounting rules (GAAP) have only a loose correlation to how most modern large companies actually operate the levers of their businesses. Management teams of well-run companies spend very little time thinking about the formal financial statements. Accounting bears the same relationship to actually running a business that the Efficient Market Hypothesis does to actually effectively investing -- which is to say, almost nothing.

cynicalkane 13y ago
GAAP book value and GAAP earnings are definitely correlated with stronger returns for shareholders. Which seems to call into question the efficient market hypothesis, but says good things about GAAP.
zero_intp 13y ago
While I agree that GAAP only vaguely represents reality, Management teams of all well run companies /DO/ think about formal financial statements. These statements require thought or liability to potential jail time. In addition, the impact of these statements on financial markets (ie: stock price) is tremendous. Management damn well should be thinking about shareholder value.
- mistermann 13y ago
  > liability to potential jail time Are there any examples of this? It seems to me the SEC didn't make much use of all the archived emails (guaranteed to be in place due to SOX) during the 2008 banking crisis which makes me generally distrustful of these formal written rules.
  - asmithmd1 13y ago
    Yes, WorldCom leaps to mind http://www.accounting-degree.org/scandals/ http://www.accounting-degree.org/scandals/ They misstated costs as investments and were able to show big profits - for a while.
    - mistermann 13y ago
      While Worldcom is one incident where one(?) person was punished, it is from 2002, and from that page, it was following that incident that they enacted SOX, which afaik hasn't been used since. Or if it has, the incidents have been few and far between. I will continue to believe the system is rigged.
amitagrawal 13y ago
"Management teams of well-run companies spend very little time thinking about the formal financial statements." Not true at all. Well run companies do spend a lot of time in preparing their financial statements. First, it is required by law, see - Dodd-Frank, Sarbanes-Oxley, etc. Second, it can get well-run companies with good intentions into a lot of trouble with the SEC and investor lobbying groups.
- c2 13y ago
  Sure, it's something the CFO thinks about, but it isn't really something that plays a factor into decisions about how to run the business for other C-level executives.

by pmarca 13y ago

cynicalkane 13y ago

GAAP book value and GAAP earnings are definitely correlated with stronger returns for shareholders. Which seems to call into question the efficient market hypothesis, but says good things about GAAP.

zero_intp 13y ago

While I agree that GAAP only vaguely represents reality, Management teams of all well run companies /DO/ think about formal financial statements. These statements require thought or liability to potential jail time. In addition, the impact of these statements on financial markets (ie: stock price) is tremendous. Management damn well should be thinking about shareholder value.

mistermann 13y ago
> liability to potential jail time Are there any examples of this? It seems to me the SEC didn't make much use of all the archived emails (guaranteed to be in place due to SOX) during the 2008 banking crisis which makes me generally distrustful of these formal written rules.
- asmithmd1 13y ago
  Yes, WorldCom leaps to mind http://www.accounting-degree.org/scandals/ http://www.accounting-degree.org/scandals/ They misstated costs as investments and were able to show big profits - for a while.
  - mistermann 13y ago
    While Worldcom is one incident where one(?) person was punished, it is from 2002, and from that page, it was following that incident that they enacted SOX, which afaik hasn't been used since. Or if it has, the incidents have been few and far between. I will continue to believe the system is rigged.

amitagrawal 13y ago

"Management teams of well-run companies spend very little time thinking about the formal financial statements." Not true at all. Well run companies do spend a lot of time in preparing their financial statements. First, it is required by law, see - Dodd-Frank, Sarbanes-Oxley, etc. Second, it can get well-run companies with good intentions into a lot of trouble with the SEC and investor lobbying groups.

c2 13y ago
Sure, it's something the CFO thinks about, but it isn't really something that plays a factor into decisions about how to run the business for other C-level executives.