Lecture
Print versionReporting to Shareholders: What accounting do they really need?
The Department of Management was delighted to welcome Professor Stephen H. Penman to King’s on 24 November. Professor Penman, Columbia University, gave a public lecture ‘Reporting to Shareholders: What accounting do they really need?’ in the Great Hall, Strand Campus.
Professor Penman focused his lecture on how accounting can help shareholders to value their ownership stake in a business. He highlighted the limitations of cash flow accounting for equity valuation purposes but also raised important challenges for accrual accounting in this role. He argued that shareholders need an income statement which helps them both to measure current fundamental performance and to predict future fundamental performance, and hence to estimate equity value. His view of the income statement serving a central role in financial reporting implied a more limited role for the balance sheet, consistent with the investment philosophy of the famous Columbia professor Benjamin Graham. Specifically, the balance sheet should provide an anchor for equity valuation but exclude subjective speculation (or ‘water’ in Graham’s words) in asset values. Professor Penman went on to argue that the use of ‘fair values’ in financial reporting poses a particular danger in relation to introducing water onto the balance sheet, citing the 1990s tech bubble, the Enron debacle, and the recent banking crisis as events within which fair value accounting has been significantly implicated. He also raised concerns about current proposals for the use of fair value accounting for financial instruments in the US and the current adoption of a balance sheet rather than an income statement focus by both the FASB and the IASB.
Colin Clubb, Professor of Accounting and Financial Management at King’s, thanked Professor Penman for his insightful analysis of directions for the development of accounting helpful to the valuation needs of shareholders. He pointed out that Professor Penman’s views were underpinned by his major contribution to capital market research in accounting over many years and that his lecture was invaluable to students on the MSc in Accounting, Accountability, and Financial Management programme at King’s. Professor Clubb judged that the lecture’s questioning of fair value accounting as the main basis for improving accounting for equity valuation was an important insight for policy-makers, investment analysts and investors.
Stephen H. Penman is the George O. May Professor and the Morgan Stanley Research Scholar in the Graduate School of Business, Columbia University. Prior to his appointment at Columbia in 1999 he was the L.H. Penney Professor in the Walter A. Haas School of Business at the University of California at Berkeley. From 1990-95 he served as Chairman of the Professional Accounting Program and Chairman of the Accounting Faculty at Berkeley where he initiated and chaired the Haas School's Annual Conference on Financial Reporting. He has served as a Visiting Professor at Columbia University and the London Business School, and as the Jan Wallander Visiting Professor at the Stockholm School of Economics.
The Department of Management launched a new MSc Accounting, Accountability, & Financial Management this year.
A copy of the presentation made by Professor Penman is available to download below.
Professor Penman focused his lecture on how accounting can help shareholders to value their ownership stake in a business. He highlighted the limitations of cash flow accounting for equity valuation purposes but also raised important challenges for accrual accounting in this role. He argued that shareholders need an income statement which helps them both to measure current fundamental performance and to predict future fundamental performance, and hence to estimate equity value. His view of the income statement serving a central role in financial reporting implied a more limited role for the balance sheet, consistent with the investment philosophy of the famous Columbia professor Benjamin Graham. Specifically, the balance sheet should provide an anchor for equity valuation but exclude subjective speculation (or ‘water’ in Graham’s words) in asset values. Professor Penman went on to argue that the use of ‘fair values’ in financial reporting poses a particular danger in relation to introducing water onto the balance sheet, citing the 1990s tech bubble, the Enron debacle, and the recent banking crisis as events within which fair value accounting has been significantly implicated. He also raised concerns about current proposals for the use of fair value accounting for financial instruments in the US and the current adoption of a balance sheet rather than an income statement focus by both the FASB and the IASB.
Colin Clubb, Professor of Accounting and Financial Management at King’s, thanked Professor Penman for his insightful analysis of directions for the development of accounting helpful to the valuation needs of shareholders. He pointed out that Professor Penman’s views were underpinned by his major contribution to capital market research in accounting over many years and that his lecture was invaluable to students on the MSc in Accounting, Accountability, and Financial Management programme at King’s. Professor Clubb judged that the lecture’s questioning of fair value accounting as the main basis for improving accounting for equity valuation was an important insight for policy-makers, investment analysts and investors.
Stephen H. Penman is the George O. May Professor and the Morgan Stanley Research Scholar in the Graduate School of Business, Columbia University. Prior to his appointment at Columbia in 1999 he was the L.H. Penney Professor in the Walter A. Haas School of Business at the University of California at Berkeley. From 1990-95 he served as Chairman of the Professional Accounting Program and Chairman of the Accounting Faculty at Berkeley where he initiated and chaired the Haas School's Annual Conference on Financial Reporting. He has served as a Visiting Professor at Columbia University and the London Business School, and as the Jan Wallander Visiting Professor at the Stockholm School of Economics.
The Department of Management launched a new MSc Accounting, Accountability, & Financial Management this year.
A copy of the presentation made by Professor Penman is available to download below.
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