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Bridging the GAAP

Robin Hardy highlights how tricks of the trade can prevent investors seeing the true picture of a company's financial situation
Bridging the GAAP

Company accounts can be difficult for private investors to fathom at the best of times: differing accounting approaches, different levels of prudence and changing accounting standards compound the problem.

1970s trade union leader Clive Jenkins called company accounts “totally and utterly useless” and in his 1992 book Accounting for Growth City legend Terry Smith exposed questionable practices exploiting Generally Accepted Accounting Principles (GAAP). Smith’s book excoriated many leading UK companies and helped kick off change in UK company accounting and reporting standards. Accounting standards are constantly evolving, seeking to make the presentation of results better reflect true performance and make comparisons across sectors, markets and (ideally) different countries possible. 

However, as new standards emerge, companies increasingly present their accounts in ‘adjusted’ forms to tell their trading story the way they want it to be seen. While accounting standards can be tracked and quantified, companies’ adjustments are non-standard as each chooses what items to exclude or add back in order to ‘normalise’ their figures, creating something of a minefield. 

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