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By Todd Cheney
Public companies face a dearth of clarity on critical issues less than two months before they must adopt on Dec. 15 U.S. and international accounting standards for recognizing and reporting revenue.
The potential uncertainty could be more than just a headache for corporate financial and accounting departments; it could lead to financial statement inconsistencies, ostracize the individual investor, and potentially open the door for intentional manipulation of corporate financials.
“Look at companies like Ford and GM,” Tien Tzuo, CEO and founder of Zuora, the Silicon Valley-based provider of subscription commerce, billing and finance systems, told Bloomberg Tax.
“GM is basically saying the difference is going to be $1 billion,” Tzuo said. “Now GM is a big company, $1 billion is not a small amount, but on a relative basis it’s still a $1 billion. Ford is basically saying the impact is $25 million. But you guys are the same company with the same business model, right? You both make cars, you both have fleets. How can it possibly be such a big swing? It doesn’t make any sense.”
“We are going to live through a period, one year, two years, or three years, of ambiguity,” Tzuo added. “Every company that is out there putting a stick in the ground saying there is no material effect, I don’t know how they are in a position to say that.”
Tzuo said he thinks “most companies are good” when asked about the potential for intentional financial statement manipulation as the result of the new standard.
“I think 99 percent of the people will follow the rules to the best of their abilities,” Tzuo said. “But look, like anything else, does this open up the possibility of bad actors or a bad apple in a barrel? Absolutely.”
Tzuo indicated that the Financial Accounting Standards Board might not have achieved the standardization and comparability in the new standard it had hoped, to the detriment of the individual investor.
“You have to go pore through these disclosures and look; the rich money have a staff of people going through this stuff,” Tzuo said. “They have an advantage. Individual investors, and the public market is about the individual investor, not about the smart, accredited investor. They aren’t going to have the time to go through that.”
Tzuo’s conclusion touches upon a much larger discussion—individual investors now account for just a fraction of the U.S. equities market. A June 2017 study from J.P. Morgan estimated that only 10 percent of trading volume now comes from discretionary investors. Sixty percent comes from passive and quantitative investors.
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