AD212 American Business and Management

AD212

Fall 2002

Chapter 18: Using Accounting Information

Fridson, "The Adversarial Nature of Financial Reporting" (Handout)

Ackman, "The Scapegoating of Arthur Andersen," www.forbes.com/2002/01/18/0118topnews.html

According to the text, accounting is "the universal language of business"--one that everyone understands. Who is (or should be) interested in a company's accounting information and why?

Of the financial ratios explained on pages 531-34, which are most important and why? (NB: The ratios may have varying levels of importance for different people.)

Fridson says (p.4), "Analysts who appreciate the magnitude of the economic stakes, as well as the latitude available under the accounting rules, will see clearly that a verdict derived by passively calculating standard ratios may prove to be dangerously naive." Why? That is, how can a company vary its reports from standards, given GAAP? Why would it do that?

What are the advantages and disadvantages of manipulating financial reports? What tradeoffs need to be considered? What incentives are there for manag-ers one way or the other?

In regard to the Enron scandal, do you agree that the Arthur Andersen accounting firm was a scapegoat? (Be sure to consider the material about Andersen in the text, pages 512 & 535, as well as the Ackman reading from Forbes Magazine [URL above].)