Economic consequences of accounting "It's not the economy anymore, stupid. It's the accounting." - See complete article, Browning, E.S. and Jonathan Weil. "Burden of Dobut: Stocks Take a Beating As Accounting Wories Spread Beyond Enron." The Wall Street Journal,January 30, 2002, pp. A1. 15.514 Summer 2003 Session 1 Acknowledgement is hereby given to Professor G. Peter Wilson for his authorship of the following works incorporated into this slideshow: • The Five Challenges (slides 4-5) • "What Do Intel and Accountants Have in Common?"(slides 9-16) • A Conceptual Framework for Financial Accounting (slide 17)The reaction of Concord EFS stock to its announcement of lower expected earnings Date Opening Price High Low Closing Price Volume Sept. 6, 2002 14.64 14.95 14.20 14.49 29,941,300 Sept. 5, 2002 12.90 15.00 12.60 14.30 91,129,100 Sept. 4, 2002 18.85 19.48 18.10 18.88 20,473,400 Sept. 3, 2002 19.80 20.18 19.00 19.56 10,267,600 Aug. 30, 2002 20.71 21.20 20.31 20.41 5,457,800 Data Source: Yahoo! FinanceWhat is our course objective? Ź To become intelligent users of accounting information Ź Learn the language and techniques Ź Go beyond bookkeeping and computation • Use a common framework to conceptualize issues Ź What is not our objective • to train you to be an accountant or bookkeeper 15.514 Summer 2003 Session 1The five challenges Ź Record keeping and reporting • As a preparer, having determined the numbers you want to record for an economic event, how do you record them? How does it affect accounting reports? • As a user, given the reported numbers, do I know how they were computed? Ź Computation • As a preparer, having chosen the accounting method to measure an event, how do I compute the number reported in 1? • As a user, knowing the procedures used by management, and the information necessary to execute them, how would you compute them yourself? 15.514 Summer 2003 Session 1The five challenges Ź Judgement • As a preparer, how do I choose an accounting procedure and exercise my judgement concerning measurement, recognition, and disclosure? • As a user, how do I judge the usefulness of the reported numbers? Ź Usage • As a preparer, how do I learn about the decisions that will be influenced by the reported numbers? • As a user, how can the reported numbers help me make a more informed decision? Ź Search • Where do you locate the information needed for 1-4. 15.514 Summer 2003 Session 1What is our strategy to meet this objetive? Cases and class discussion Ź Judgment challenge Ź Application of other challenges Ź Learning to communicate ideas Ź Learning from each other Ź Learning through discovery 15.514 Summer 2003 Session 1What is our startegy to meet this objective? Incentives Ź Learning useful skills • Graded assignments • Graded class participation • Warm and cold calling 15.514 Summer 2003 Session 1What is “good” participation? Ź Quality, not quantity. Ź Analyzing and discussing course material. Ź Questioning the analysis of others. Ź Seeking clarification. Ź Contrasting issues within other settings, courses, and / or other countries. Ź Changing the direction of discussion. Ź Summarizing / synthesizing. Ź Adherence to guidelines for professional conduct. 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź Intel produces microprocessors, chipsets and other semiconductor components to meet the diverse needs of their customers. Ź What do accountants produce and who are their customers? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź Intel’s customers use microprocessors as the “brain” of their computers. Ź What do accountants’ customers do with accounting information? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź Intel’s operating inputs include materials, technology and capital. Ź What are the inputs to the accounting process? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź Intel’s product designs depend on its customers’ needs, competition, availability of inputs and technological constraints. Ź What factors influence the design of accountants’ products? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź Intel’s customers would prefer microprocessors that: • Execute 1 teraflop per second • Run on ambient solar energy • Can be worn discretely as jewelry • Are completely bug-free • Support all software and operating systems • Are given away to anyone who wants them Ź Why don’t they get all of these? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź What kind of information would accountants’ customers like? Ź Why don’t they get it? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź The quality of Intel’s products is based on some of the following factors: • Reliability and dependability (CPU must know how to multiply) • Compatibility with existing software Ź What factors can be used to determine the quality of the products accountants produce? 15.514 Summer 2003 Session 1What do Intel and accountants have in common? Ź Intel’s customers assess quality based on: • Intel’s reputation • Independent ratings • Software and hardware engineers’ opinions • Customers’ own judgment Ź How do accountants’ customers assess the quality of accounting information? 15.514 Summer 2003 Session 1A conceptual framework for financial accounting Economic Activity Accounting Decisions Reported Numbers User’s Decisions Accounting Quality Assessment Performance Assessment Preparers’ Domain Users’ Domain Outside reporting entity Economic Outcomes Economic Consequences Inside reporting entity 15.514 Summer 2003 Session