transparent accounting: cash flow

We had a good old rant round the kitchen table last night, and of course I was going on about open-book accounting. My friend Jacob, who works for the Financial Services Authority, made the point that the present discipline of quarterly or half-yearly reporting already encourages too much short-termism, so instantanous reporting – which is what open-book accounting is – would surely be worse.

I think he’s wrong. The quarterly or half-yearly results that listed companies have to provide are heavily massaged, in line with the rules, but the raw figures that open-book accounting would have to show would need interpretation; and since analysts would be able to read real accounts, rather than the runes and the cracks in whatever bones corporations throw at them, they’d learn to interpret them realistically. In any case, it’s not the reporting cycle that encourages short-termism, it’s the reward structure for those who trade in listed securities.

Open-book accounting is massageable too. If companies knew that their accounts were open to perusal, they’d change the way they post to them (just as they adapt their present periodic reporting to suit the market and the rules). There is, however, one measure  that’s much harder to massage, which is cash flow.It’s not a terribly good immediate guide to profitability, but it’s one of the most reliable guides to a company’s overall health – taken, of course, like all financial data, with a pinch of salt and a suitable degree of interpretation.

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