What an excellent point

Investors (and many others) don\’t actually use company accounts in decisions about investing.

Because an investment decision (as with a lending one and many others) is a forward looking one. We\’ve many sources of forward looking information: announcements to markets (which the directors have to make about anything that might impact on the business), changes in prices of products or raw materials (gold mining shares do change price along with the gold price, people don\’t wait for the annual accounts to see the effect on profits etc), interest rates, GDP, all sorts of places we get our forward looking information from.

Annual accounts come out what, 3-9 months after the end of the relevant period? The audited accounts that is? Just not useful for those forward looking decisions for we\’ve many month\’s worth or newer and better information about future prospects than what is contained in those audited accounts.

The value of the accounts is that we can now check and see whether what the directors have been telling us through the markets for the past 15-21 months was actually grounded in reality. Given that everyone knows that this check is going to come that works pretty well (although certainly not perfectly).

Which, as a piece of logic, rather neatly punctures Ritchie\’s insistence on all that information that must be included in company accounts. He really does tell us that people must be able to use them for forward looking decisions. But we don\’t use them to do so at all, because they\’re old by the time we get them. They\’re a check on past information releases, not the information releases themselves. We\’ve a whole new set of information releases by the time we find out whether the directors have been telling us porkies or not.

2 thoughts on “What an excellent point”

  1. They also tell the astute investment analyst whether a company is held together by various accounting wheezes that will inevitably fall apart. Terry Smith’s “Accounting for Growth” gave plenty of examples from the ’80s/’90s. The accounting tricks change, but the problem never goes away.

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