At a CFO magazine event, one CFO of a
Fortune 500 company described GAAP-based financial reporting as a champion race horse compared to a dray horse: finely tuned, beautiful to look at - but good for absolutely nothing useful.
And, it is worth remembering CFO magazine named Enron's Andrew Fastow CFO of the year - just before the company fell apart.
Until financial reporting accurately reflects the reality of digital era financial economics, growth projections, planning, resource allocation decisions and analysts' assessments for all companies affected by technology - which is to say, all companies - will be less than optimal. Smart businesses take a proactive approach to presenting data they believe is important to judge their performance. JL
Vijay Govindarajan and colleagues report in Harvard Business Review:
Financial statements fail to capture the value created by digital companies. An idea with uncertain prospects but some chance of reaching a billion dollars is more
valuable than a project with net present value of a hundred million
dollars but no massive upside. Risk is a feature, not a bug. Discounted future cash flows (are) impossible to apply to companies run
as a portfolio of ideas. Software workers’
and product teams’ time is the company’s most valuable
resource. They can always raise financial capital. CFOs consider the calculation of GAAP a
hindrance to resource allocation
decisions.