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Money Buzz 3/03

A CD-ROM to organize your family's important papers, why life insurance may be illegal and more

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This story appears in the March 2003 issue of Entrepreneur. Subscribe »

Organizationally Impaired?

By now you know the drill. An accounting faux pas surfaces, the company in question has to restate earnings, and wham, bam, its stock price tumbles. Such scenarios have turned investing in stocks into a walk in a minefield. So should investors wait until accounting reforms eliminate the threat? Not necessarily, say Wharton accounting professors Scott Richardson and Irem Tuna, who in a new study contend that investors can spot risks and shy away in time to safeguard their money.

Richardson and Tuna studied 225 firms forced to restate financial results between 1971 and 2000 and found they tended to report higher accruals (portions of net income not accounted for in cash flow) than their peers. "Sometimes firms under pressure to meet earnings targets book greater accruals than they will actually receive," says Tuna.

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