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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 »

OrganizationallyImpaired?
By now you know the drill. An accounting faux pas surfaces, thecompany in question has to restate earnings, and wham, bam, itsstock price tumbles. Such scenarios have turned investing in stocksinto a walk in a minefield. So should investors wait untilaccounting reforms eliminate the threat? Not necessarily, sayWharton accounting professors Scott Richardson and Irem Tuna, whoin a new study contend that investors can spot risks and shy awayin time to safeguard their money.

Richardson and Tuna studied 225 firms forced to restatefinancial results between 1971 and 2000 and found they tended toreport higher accruals (portions of net income not accounted for incash flow) than their peers. "Sometimes firms under pressureto meet earnings targets book greater accruals than they willactually receive," says Tuna.

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