Yesterday's Wall Street Journal Heard on the Street column contained a very interesting quote in its story on Google's pre-IPO accounting for stock options (as background GAAP is Generally Accepted Accounting Practices -- the set of accounting rules that US companies must use in their financial statements):
"On the surface, it makes the numbers look more favorable on a GAAP basis," said Youssef Squali, an analyst at Jefferies & Co. in New York. But, he said, when comparing Google's core financial performance to its rivals, "GAAP is the last thing you'd use," because of the diverse factors, such as options expenses, it takes into account.
If GAAP is the last thing that analysts use for comparing companies, then what is it good for? As the Financial Accounting Standards Board (FASB) puts it:
Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information. Financial information about the operations and financial position of individual entities also is used by the public in making various other kinds of decisions.
In other words, investors need a clear set of standards with which to judge investment opportunities. The whole purpose of GAAP is to provide a consistent set of financial measures across companies.
When analysts start saying that GAAP is irrelevant to judging a company like Google, then we know our accounting system is clearly broken.
(More later when I publish my paper on Reporting Intangibles.)
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