BSU professor advises companies to tell the truth

Even a kindergartner could understand the basic theme of a Boise State University professor´s new book on corporate financial reporting, published in the wake of nearly two years of financial scandals.

Ready? Here it is:

Tell the truth.

Julie Howard
The Idaho Statesman

The book, “Quality Financial Reporting” (McGraw-Hill, 2002; $49.95), was written by Paul Bahnson, a BSU professor of accounting, and Paul Miller, an accounting professor at the University of Colorado, Colorado Springs.

The 300-page book, of course, goes a bit beyond the kindergarten level in its discussion of infusing a new culture into financial reporting by public companies. The book, started well before the Enron and WorldCom corporate scandals, includes a chapter on Enron´s misdeeds and was updated shortly before publication to include mention of the massive reform effort in financial reporting.

The theme of “Quality Financial Reporting” is basically that companies need to provide more detailed information to shareholders and sincerely make an effort to keep them apprised of changes.

“It is not a checklist,” warns Bahnson, who has been at BSU for four years, and previously taught at the University of Montana and the University of Colorado. “It´s a mindset, not a set of tactics.”

But the book does make specific suggestions to corporations on how they can add more information to financial reports, such as:

• Include current market value of assets, rather than depreciated value, on financial reports.

• Go beyond the required quarterly reports if events occur that could create uncertainty. Rather than just report the event, also include financial and business information such as sales, units shipped and inventory levels.

• Expense stock options to account for those given to executives and employees.

All this encouragement for companies to do the right thing in their financial statements doesn´t just appeal to their sense of fairness. The book also appeals to the bottom line.

“The capital markets respond to high quality reporting,” said Bahnson. “A number of studies confirms this. The higher the quality of the reports, the lower the cost of capital, and that translates into higher stock prices as well.”

A favorable review of the book by The Motley Fool columnist Tom Jacobs acknowledges that shareholders “must vigorously insist that financial reporting requirements give investors the tools they need to make the best investing decisions … but we probably can never legislate or regulate a system in which company managers decide to be the best in clear, complete and candid disclosure.”

Bahnson admits the book is optimistic about corporations voluntarily changing their methods, but says it´s not an unrealistic vision for the future.

“If the rewards in the marketplace are there, more and more companies will start to follow this,” he said.

To offer story ideas or comments, contact Julie Howard
[email protected] or 373-6618

http://www.idahostatesman.com/Business/story.asp?ID=30653