Professional accountancy is not for wimps. Drawing on her many years of experience, Alison Thomas offers some light-hearted advice
This article was first published in the June 2019 UK edition of Accounting and Business magazine.
Q While investors continue their love affair with profit, corporates will continue to be obsessed with short-term returns. Is there anything we can do to break this vicious cycle?
A Where do I begin? Companies need to make a profit. If they didn’t, investment in new (potentially life/planet-saving) products couldn’t take place. Employment would be through the floor, taxes would evaporate and social-spending wouldn’t exist. So let’s not throw the baby out with the profit bathwater.
Of course, sometimes companies take short-term decisions to try to artificially inflate today’s profits. They may do this for lots of reasons. None of them are good. But that’s where the discipline of the stock market should kick in (note I use the word ‘should’).
Investors care about future cash flows. To forecast these, they look at the past. But in doing that, they are all too aware of the small print – the past may not be a good guide to the future. And so they factor in every indicator they can about the sustainability of performance. They look at the company’s market position and product pipeline. They also look at employee satisfaction, reputational risk and environmental exposures. But their ability to factor in such issues is only as good as the information available. This is where the profession plays its part.
The more companies can provide credible information about the sustainability of their performance, the more the cycle will go from being vicious to virtuous.
Q Book value is miles away from market value. Are financial statements irrelevant?
A A number of academics (perhaps most notably Baruch Lev at NYU Stern School of Business) argue that the relevance of accounting is in terminal decline. Their arguments typically run along the line that intangibles drive success in today’s world. Intangibles are not routinely recognised on the balance sheet. The result is a massive disconnect between book and market value. QED.
My take: balance sheets are not there to value the company. That is what markets do. How do investors price companies? As we all know, they typically start by forecasting the future cashflow. And they do this by analysing financial statements.
But financial statements aren’t – and never have been – enough for making investment decisions. Investors hunt out information on a company’s products, quality of management, staff loyalty, the ability to innovate – there are heaps of inputs into any decision to buy or sell. And investors get this information from a wide variety of sources: management commentary, company briefings, gossip from competitors, customers or disgruntled employees, to name but a few.
Would investors’ forecasts be improved if intangibles were on the balance sheet? That’s a big question. But the disconnect between market and book value today does not mean that financial statements are any less valued than in the past – they remain the only credible window on financial performance. It simply means that the investment case of a company is not fully captured in numbers – that credible non-financial information really does count.
Q I’ve just joined a firm of workaholics. Colleagues regularly reply to emails at 2am. Am I going to have to do the same?
A I too used to be guilty of email-itis. I was online 24/7. But I am living proof that you can change. Two thoughts: first, emails are often blessed with a short shelf-life. If you wait long enough (eg the length of the average summer holiday) they become irrelevant or are dealt with by others within your team. Secondly, you’re not alone. I suspect that just about everyone in your team feels the same. So make the change. I bet others follow suit.
Alison Thomas is a consultant.
"The disconnect between market and book value today does not mean that financial statements are any less valued than in the past"