Will You Adopt Quality Financial Reporting?

Ø Introduction
Company is presently “playing around with the scorecard”
1. Embracing the Quality Financial Reporting (QFR)
2. Start representing as much useful public information as possible
o Those ways → promises low capital cost → higher security prices → because its more than likely that the capital markets respond to inadequate reporting by bidding stock prices down
Ø The traditional reporting model
Traditional reporting strategies → Capital markets depend totally on managers to provide public information for their use
No standardize Generally Accepted Accounting Principles (GAAP) → compromised
Report → too long → managers resisted to initiate new requirements
Political pressure → severely compromised standards
TQM → the goal is to build good customer relationship and keep working as good as possible
Adopt QFR → Build better relationship with capital markets by providing the best financial statement
Ø Solving the problem
Capital markets have needs and desires for financial information that are not addressed by traditional public reports
Balance sheet → perceived as irrelevant
Footnotes seem to frustrate analysts the most → capital markets cannot understand them → they do not contain adequate information
Three negative outcomes of complying with GAAP:
Lack of useful information in financial statements → cause market to pursue other investment opportunities → securities’ lower prices and higher capital cost
ii. Markets decide that the company’s investment potential is great → people may invest after:
1. Taking into consideration the resulting high degree of uncertainty
2. Insisting on higher expected rate of return→ doesn’t advance the stockholders’ interests
iii. Sophisticated investors and credits will turn elsewhere → market want to discover information that no one else know
Managers provide additional public information:
i. Less uncertainty would exist
ii. The analyst’ extra effort and the redundant cost of finding that information would be avoided
iii. Information would be more reliable
§ Uncertainty means more risk to investors → demand higher return
Ø Quality financial reporting–A superior strategy
Adopting QFR has positive effects for essentially everyoneManagersi. Having access to cheaper capital
ii. Earn more income and enjoy payoffs from appreciated stock options and other incentives
Stockholdersi. Greater demand for their sharesii. A rate of return that’s appropriate for their real risk
Investors and creditorsi. They can evaluate investment opportunities with more emphasis on their financial meritsii. Less concern for risk created by incomplete informationThe economy operates more productivelyi. The capital markets can establish security prices more efficiently
Two groups will lose when QFR is practiced:§ People who has somehow fooled the market§ People who successfully cheat the markets with illegal insider information
Ø The high road
Get started with QFL§ Doing what FASB recommended instead doing what it has permittedi. Managers usually do not use preferred method → they think that footnote will not improve their securities’ pricesii. QFR suggest → Markets usually penalized stockholders with lower security prices even management reports larger earnings on the income statement§ Engage tough auditors and do what they say instead of picking cheap and easy auditors who do what managers say§ Branch out into new areas based on your own market research and common sense as to what helps statement readers make better decisions
Ø Objection
o QFR → higher preparation costs created by additional reporting and auditing efforts Respond
o The cost of them is still less than the benefit to financial statement users of
§ Minimizing the cost of providing the data by having the firms doing it at once
§ Having the firms as the source of information
§ Making available an additional source of information that confirms or denies other sources
Ø Are you ready?
o Resisting QFR because of preparation costs seems to be very shortsighted
o It must flow from the efforts