Abbigail,
Maybe being a CPA is part of your problem (no insult is intended here). CPAs are trained in generating GAAP reports, but I think they are insufficiently trained in understanding the implications of the numbers they generate. Financial analysts and forensic accountants are trained to look past the numbers.
I'm sure that you remember that in the bad old days changes in the financial condition of a company were generally reported on a working capital basis. Now a cash flow statement is mandated, which is much more intuitive and makes analysis so much easier. Unfortunately, few people take the time to look at this, the most revealing of all financial statements (IMO).
When I looked at LU's numbers I saw trouble brewing in several areas. Specifically, I questioned high levels of A/R, inventory, the percentage reduction in the provision for doubtful accounts, and what appeared to me to be a misstatement of operating cash flows by shifting $625MM in A/R to the QSPE.
I did not foresee a shortfall in revenues, but given the concerns I listed above, perhaps I should have. GVTucker was absolutely correct when he pointed out that the issues I raised frequently portend revenue problems.
Here is a suggestion. Look at the cash flow statement and the income statement side by side, and ask yourself whether the cash flow adjustments make sense from an operational perspective.
We know that annual cash flow from operations was negative while earnings were very strong. We can explain away some of the differences by the cumulative effect of accounting changes and by expenditures for restructuring. But the remaining difference requires explanation. Why did inventories and A/Rs rise precipitously?
Here is a textbook you might want to buy: Financial Warnings. Sorry, but I can't remember the author.
TTFN,
CTC |
