© 2000 John Petroff
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© 2000 John Petroff |
5)- Correction of distortions not recommended
Should an analyst make the necessary corrections to take out all observed distortions? The answer is no in most cases. Even for an inside analyst, modifying revenues and expenses can be outright dangerous because it would suggest that there are accounting or managerial mistakes, and that may upset upper management. For most outside analysts, publicly available information is clearly insufficient to make corrections. The only case when corrections are inescapable is when a company is acquiring or merging with another company. Then, the analyst must assess company real earnings to reach a realistic valuation: getting as close as possible to the truth is then crucial. But, in other cases, even for a bank officer who will often receive any amount of information asked from a borrower, correcting distortions is a numerical exercise that takes time and attention away from what the analysis is all about, and that is to understand management decisions that affect company's earnings power.
See review questions Q-13A5.1 and Q-13A5.2.
See research assignment R-13A5.1.
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