By Brent Miller, CFA
President & COO, Gradient Analytics (a Sabrient Systems company)
“Change is the law of life. And those who look only to the past or present are certain to miss the future.” – JFK
When evaluating the earnings quality of a given company, a forensic accounting firm like Gradient Analytics focuses on key indicators that may indicate that a company has taken liberties to cosmetically enhance its financial performance via aggressive revenue recognition and/or the understatement of expenses. Signals that a firm may be engaging in financial gamesmanship include:
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Divergence between reported earnings and free cash flow (i.e., an increase in accruals)
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Overstatement of assets
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Understatement of liabilities
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Negative or decelerating organic revenue growth
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Persistently widening gap between GAAP and non-GAAP EPS
In this article, I discuss a new amendment to the accounting standards that seeks to reduce inconsistencies and improve standardization of revenue recognition practices. Read more...
