"The ValueReporting Revolution: Moving Beyond the Earnings Game," published by John Wiley & Sons, Inc., proposes a radical new corporate reporting framework that promises to reduce stock market volatility and lower the cost of capital by providing the new kinds of information that investors need in today's economy.

According to its authors, PwC senior fellow Robert G. Eccles, PwC partners Robert H. Herz and David M.H. Phillips, and E. Mary Keegan, former head of PwC's Global corporate reporting group and current chair of the U.K. Accounting Standards Board, traditional corporate reporting on the value of factories, equipment and inventory and other tangible assets doesn't provide the information that investors are looking for, such as the value of intellectual capital, market share, brand value and other "soft" or intangible assets.

The authors would have corporate reporting expanded to include current non-financial performance measures such as customer retention, employee turnover, strategic direction, new product development and speed-to-market.

In the conservative world of accounting standards, the core proposition of the book borders on being truly subversive.

"It's radical," said Eccles, president of Advisory Capital Partners. "Very radical."

The book says that stock prices are being set more by Internet rumors, earnings surprises, external events and market sentiment than by the performance information that current reporting provides. The discrepancy between the information in mandated reports and the information that is really sought, the books says, is causing market volatility and, ultimately, a higher cost of capital.

Eccles and his co-authors warn that analysts depend too much on short-term earnings estimates and that corporate managers therefore try too hard to influence earnings reports. The resulting stock valuations are inaccurate over the long-term and therefore liable to lurch wildly in search of a proper level.

The solution, the authors say, is for companies to provide relevant, accurate information on a real-time basis that would render quarterly reports barely useful in the valuation of stock. Ideally, management would make the information available to the public as soon as they themselves become aware of it.

The new system would call on corporate leaders to adopt new policies of transparency and for analysts and regulators to help. Companies that move in that direction first will gain competitive advantage. Some companies, the book says, are already doing so and with measurable success.

The authors do not propose scrapping the current framework. Rather, they would simplify existing standards so that they provide only information that is truly useful, and expand the framework to include information that has a more relevant and realistic impact on the valuation of corporations.

"I think it will start out on a voluntary basis with experimentation," Eccles said. "What you're going to see, and what we're calling for, is for companies to experiment internally. They'll start reporting this to the market, and what you'll see is consortia of companies in given industries, accounting firms, consulting firms and sales-side analysts working together to create standards."

-- SmartPros News Staff

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