In the almost two and a half decades Jim Wahlen has been teaching Advanced Financial Statement Analysis at the Amsterdam Institute of Finance, financial reporting has gone through major changes. Regulation has been significantly strengthened, as has the role of the accountant. As Wahlen hands the baton to his successor Matt Wieland, he looks back on these developments.

“Accounting quality, meaning the richness and usefulness of the information in companies’ financial reports has increased substantially over the past several decades”, Wahlen argues. Several major developments and trends have been contributing to this.

Accounting scandals

Principally, in the early 2000s, accounting was rocked by several major scandals. In the US, Texan energy giant Enron collapsed taking reputable accounting firm Arthur Andersen with it. At the same time in Europe, Italian dairy company Parmalat and Dutch supermarket chain Ahold went through major fraud incidents.

This gave rise to strong regulatory responses. “In the aftermath Sarbanes-Oxley and other regulatory actions increased senior executives’ responsibility for the financial statements. It also empowered auditors to maintain a higher level of independence and integrity in fulfilling their responsibilities in providing a reliable opinion on the fairness of financial statements.”

Reporting requirements were strengthened as well. “We’ve seen important improvements like the expensing of stock options based compensation and  the capitalizing of operating leases on the balance sheet. This means we’re now getting better income statements and better balance sheets.”

At the same time, since the turn of the century, there has been a convergence between US GAAP and IFRS, Wahlen observes. “This has also been a big and welcome shift. Twenty-four years ago they were quite different. The two boards have brought the two sets of standards much more closely together.”

New challenges for accountants

Though the strengthening of accounting standards has made financial reporting more arduous for businesses, and the work for accountants more challenging, Wahlen is convinced this leads to added value for investors and creditors in the capital markets and the economy at large. “There is a number of research studies that show how over time, as accounting standards get better, the capital markets rely more heavily on the information in financial statements. For example, we see that accounting information like earnings numbers do an increasingly good job of explaining stock prices and stock returns that we see in the capital markets. I think that’s pretty strong evidence of increasing value added as well.”

One parallel trend is that there has been an increase in the focus by companies on non-GAAP measures, like EBITDA. An unwelcome trend, Wahlen continues. “EBITDA doesn’t measure anything about the firm’s financial performance in a way that is economically meaningful. This is taking away attention from the much more fundamental and complete measures of firm performance that are governed by accounting standards, like net income and operating cash flows.”

Combined with the increasing complexity of reported information, it means skills to interpret financial reporting have become more important in an increasing number of fields. This is also reflected in the participants in the courses Wahlen has been teaching at the AIF. From equity analysts, investors, fund managers and bankers, to security markets regulators, and even central bankers involved in the monetary process, Wahlen has seen them all.

“The course helps them understand how to more deeply and more effectively analyze companies’ income statements, balance sheets, and cash flows. From the analysis,  they get a heightened sense of how to evaluate the quality of firms’ financial reporting, and how well a firm’s financial statements represent its underlying economic reality. They also learn how to use the accounting information to compute a variety of ratios that help understand profitability, growth, and risk, which are of course the drivers of value. We use that information to build forecasts of firms’ future business activities, future income statements, balance sheets, and cash flows. Then they can run various financial decision models, like valuation models, credit models, or M&A models.”

Emergence of ESG reporting

Wahlen is cautious when it comes to predicting what lies in the future for accounting. However, one development he does see as important is the emergence of ESG reporting. “That’s going to be a big improvement in the financial reporting process moving forward. Right now, I think ESG reporting is a little bit of a wild west with an awful lot of choice in what firms measure and report. So I think, as demand for ESG reporting increases, there will have to be more professional guidelines and principles for fair and consistent ESG reporting.”

Whatever happens next in the field of accounting, it will be up to Wahlen’s successor Matt Wieland to integrate it in the Advanced Financial Statement Analysis program. Wahlen has the utmost confidence that Wieland will do a good job. “He’s an outstanding instructor of accounting and financial statements analysis. He teaches a similar course at his university. I’ve given him all of the materials I’ve built over the years, but naturally he’s building his own course. I have no doubt he will teach the course very well in the future.”

Matt Wieland successfully substituted Jim Wahlen already once, proving to be a worthy successor. Quote from one of the participants: 
“A great guy, and clearly hugely knowledgeable. I appreciated the level at which he pitched the subject. He does well with injecting a bit of energy into a dry subject! “

Learn more about AIF’s Advanced Financial Statement program here 

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