Numbers investors can trust

What counts isn't the bottom line but rather how it is calculated.

Accountants, regulators, and corporate executives are again embroiled in debate, this time over how to account for stock options issued in one year but sold in another, when their value may have changed dramatically. This is just the latest act in a recurring drama: the conflict between the investors' desire for more accurate corporate valuations and the desire of companies to control perceptions of the way particular items will affect their net income. A few years ago, for instance, the debate focused on the techniques companies use to account for goodwill in their acquisitions and whether changing these techniques would damage their earnings and thus their appeal to investors. As baby boomers grow ever greyer, the stated value of pension reserves will be next.

Unfortunately, this kind of financial reductionism is a poor substitute for the information that investors really need. Their trust has been battered by stunning corporate greed, ethical lapses of accounting firms, and the malfeasance of high-profile executives and financial analysts. Faced with a political backlash, regulators are right to take steps to restore investor confidence. But unless companies become more transparent and boards of directors provide more information on the underlying performance of their businesses, investors can't be blamed for withholding that trust ... READ MORE

Released by McKinsey & Company