Mark -
...But I wonder about the impact of moving the 'deferred salary expense' off the income statement when it comes to comparing companies earnings or growth rates.
This relates to one of the other points that I tried to make.
It seems to me to be a Wall Street myth that there is any reason to expect that investing is such an easy exercise that one or two or even several numbers could be sufficient to compare two or more companies. Every company is unique and any attempt to reduce them to a small quantity of simple numbers is mere wishful thinking.
It is commonly accepted that there should be accounting standards set so that every company can be compared using those standard numbers. Unfortunately, this does not stand up to closer examination. If investors as a group were to hire and pay accountants to simplify the comparisons between potential investments, then the argument might hold some water. In the actual case, accountants are hired and paid for by the existing shareholders for each given company. The service that they should provide to the existing shareholders is the prevention of fraud and the evaluation of management planning and execution. For a sufficiently skilled, experienced and recognized accountant, a proper report need not necessarily even include numbers, but could simply be a descriptive and conclusive report.
Contrary to popular belief, the purpose of the establishment of accounting standards is not to allow the comparison of different companies, but rather its purpose is primarily to benefit the accounting firms. The establishment of standards first of all allows the hiring and employment of accountants of lower abilities who no longer need to be imaginative, creative and analytic, but simply need to fill in blanks (this is a bit hyperbolic to stress the point). Secondly, the use of standards is a profession-wide protection against legal liability in the case of disagreements. It is a strong legal defense to say that you were just following the standards. Both of these situations also occur in most other professional associations.
If it were possible to compare all companies by using a small quantity of simple numbers, then actual investing ability would be less rewarded as there would be a smaller degree of mispricings and less bargains, long or short.
In a practical sense, is it really such an imposition for an investor to be required to evaluate the level and trend of dilution? Or the prudence of spending shareholder funds to buy back stock at a given price?
Regards, Don |
