Wednesday, January 15, 2014

What Should My Law Students Know About Accounting?

I posed that question in an idle moment the other day.  My friend Hizzoner weighs in with a response:
But they should know that, despite appearances and protestations, financial accounting is malleable.  In short, the transactional types should leave the course with doubt, and the litigators should leave with a cross-examination checklist.
That sounds spot on to me.  I could flesh it out a bit. These are the students in my corporate finance class. Exactly one of them admits to knowing any accounting (and she has 10 years' experience, as a CPA).  For the rest--well, I spend a day each on "the balance sheet" and "the income statement."  Then I spend a day giving them three examples of (well-recognized and widely accepted) accounting devices which can lead to weird results.  One, depreciation. Two, inventory accounting. And three, the expensing of R&D.  I end by stressing that in each of these, the accounting "solution" is a defective compromise which may, after all, be the best solution to an unsolvable problem.

Now, forward to cash flows.


The New York Crank said...

Just a tangential observation: On Wall Street these days, the Plunkett Defense is superfluous. Insider traders and other "honest thieves," full of outrage and high dudgeon, will either insist that they traded blind, or tell you that they are "creating value" (mainly for themselves, of course) and how dare anybody stand in their way.

Very crankily yours,
The New York Crank

Aaron said...

Now friday, I spent some quality time with my client explaining what her business balance sheet said (her accountant prepared it), and why it was wholly irrelevant to the liquidation value of the business.

It's a service business, and without a noncompete, I don't think anyone in their right mind would pay a penny for it.