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. Some important ideas to keep in mind are that historical cost can be more reliable than fair value accounting (Flegm, 2008). As Laux and Leuz (2010) note, some have argued that fair value accounting was partly responsible for the great financial crisis of 2008. Thus, it is very important that cost accounting be approached honestly in every way.
(Revise feedback for highlight area above: Historical is required by US GAAP (for inventory/fixed asset), but some investments and other assets use FV. This is just for Financial Statement purposes not cost accounting. Is the evidence to suggest cost accountants are ignoring FV?)
Revised In addition, accounting may not accurately project the economic reality of certain business decisions. For example, investment gains and losses are now reported on the income statement and are included in Net Income calculations. This obfuscates the economic reality of how the actual business performed as investment gains and losses are included in the net income figure. Likewise, historical costs may not reflect the actual value of the asset being held. Land and real estate assets often suffer from this as their fair value may not be accurate reflected on the financial statements. As such, these nuances can often harm investors who are ignorant of the nuances behind them. In many instances, ignoring these nuances often can create severe valuation differences that can harm investors who are not aware.
2. When a company like Enron (revise highlighted...…pressure buy side analysts to provide much more optimistic reports to their clients and investors. They can also threaten to sue or otherwise discourage analysts from publishing negative reports on the company. We have seen corporations seen analysts for writing negative reports about the company, causing a subsequent decline in stock price (Francis 1994). In Amira Nature Foods, Ltd. v. Prescience Point LLC, Amira, brought claims in the Southern District of New York against short seller Prescience Point. Here the short seller made statements about the reliability of the firms financial statements which subsequently caused the stock price to decline. Indirectly, corporation can influence analysts through gifts, donations and other firms for charitable giving, which can ultimately influence the opinion…
References
1. Francis, J., Philbrick, D., & Schipper, K. (1994). Shareholder Litigation and Corporate Disclosures. Journal of Accounting Research, 32(2), 137–164. https://doi.org/10.2307/2491279
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