Gerald I. White, Ashwinpaul C. Sondhi, Dov Fried, ISBN 0-471-37594-2; ©2003
Please bring the textbook and a copy of Pfizer financials (pages 39 to 62) to the class every day.
Wharton Service:  http://wrdsx.wharton.upenn.edu/  [a516fa11; ______________]

The recent corporate accountability crises has focused the world's attention on what accounting reports can do and what it can not do.  Accounting failures at AIG, Enron, WorldCom and numerous other firms has led to extensive reforms in the US.  The Sarbanes-Oxley (2002) act includes many accounting and disclosure reforms.  But these actions could not prevent the options backdating scandals of 2006-07 or fair value crisis relating the lending crisis of 2008.  Throughout these crises what was surprising was the lack of understanding of GAAP and financial statements by many Board of Directors and Wall Street Analysts.  Through this course you will gain a better understanding of some of the issues relating to analyzing financial statements.  If one thinks of financial reporting as a game - the executives will try to put the firm in the best light under what GAAP allows, how could you as an analyst disentangle the information.

This course will emphasize the use of published financial reports by decision makers external to the firm (e.g. investors and creditors). Within each decision context, models of valuation and the current state of understanding of empirical research in accounting and finance will be analyzed. Accounting is the "language of business" and with the knowledge gained from this course, you will be able to read, interpret and critically evaluate the published financial disclosures that firms make. You will gain insights into the intense controversies surrounding the promulgation of disclosure standards and you will better understand how you may influence and be influenced by this essentially political process.  If you are interested in careers in investment banking, equity research, private equity, risk analysis and in pursuing the CFA designation, this course is a must. 516Actg.

The second major theme of the course is how capital markets react to accounting disclosures. What is (and will be) the value impact of earnings, book value and other accounting information? We will consider the traditional models and also newer insights into the pricing of securities using free cash flows and economic value added. If somebody showed the statements of a firm to you, you should be to able to see the "inside" story, ask the right questions and value the firm. The dominant approach in this course will be fundamental analysis. Finally we will survey the empirical results from the capital markets research. Bankruptcy and risk prediction models and bond rating models that use accounting numbers will be evaluated. We will look at studies that try to explain variations in the P/E ratios and price to book ratios and earnings response coefficients. Studies that document market anomalies based on accounting numbers will be discussed last.

The standard prerequisites for this course are two courses in financial accounting (for example Accounting 500 and 502). If you have taken only Accounting 500, you may still take this course, if you are willing to put in some extra effort. Please fill the Prerequisite exemption form:
http://accounting.cba.uic.edu/Classes/Prerequisite-Exemption-Form.htm and bring it to the class to get my approval.  The course uses real financial statements extensively and you should be familiar with annual reports. As a part of the course you will be analyzing and valuing one company (a company of your choice) thoroughly. For this, you may have to download 10 - Ks and other SEC filings from 'Disclosure' etc..   First class 110822

Course Requirements

In Groups: Cases 10%; Current Developments 7%; Project: 8%

Individual: Midterm Examination: 26%; Final Examination: 34%; Quiz: 15%