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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Flubbing The Footnotes
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Posted by: Jack Ciesielski 3/29/2005 8:18 AM
It's annual report season: hopefully you're one of the studious types that actually reads 'em cover to cover, with emphasis on the footnotes because it's the only time of the year they're actually filled with information.

Uh-oh. There's this disturbing story in the Wall Street Journal: "Study Finds Errors In Footnotes Less Likely To Get Fixed." It seems a trio of enterprising professors from Cornell University and Bentley College tested auditors' reactions to discovering errors in footnotes as opposed to errors embedded in financial statement figures. An excerpt:

"In one experiment, auditors were asked how they would handle a company that had underestimated the cost of employee stock options, but objected to making any adjustment. Some auditors were told the firm included the cost of stock options on its income statement; others were told the cost was shown only in a footnote.

Even though the size of the error was the same in both cases, amounting to about 4.6% of net income, auditors had very different reactions. When the error was on the books, auditors called for a full or nearly full correction on average. When the error was in the footnote, the auditors rarely called for any correction."

As we trudge toward recognition of stock compensation recognition in the second half of this year, this study has to make you wonder about the quality of the "pro forma" Statement 123 information contained in the footnotes since 1996.
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