1 Making Informed Judgments Part 1 Introduction Navigating Accounting, ® G. Peter & Carolyn R. Wilson, © NavAcc LLC. Modified by [Your Name].

2Menu  Why should you learn how to make informed judgments? Why should you learn how to make informed judgments?  Decision making hierarchy Decision making hierarchy  Characteristics of informed judgments Characteristics of informed judgments  Closing thoughts Closing thoughts View in Slide Show Mode > click hyperlink.

3  Identify bad advice and uninformed arguments  Bad advice is pervasive and it has dire consequences. Especially when it comes from reputable sources:  Media  Politicians  Special interest groups  Evaluate competing arguments  Make or evaluate accounting decisions requiring judgment Why You Should Learn How to Make Informed Judgments? 3 Return to menu

4 Who created this graphic? A.Reputable accounting professor preparing a true/false test for an on-line course B.Reputable economics professor explaining balance sheets on television C.U.S. President during a press conference to win support for the Troubled Assets Relief Program (TARP) D.Tina Fey impersonating Sarah Palin teaching accounting and economics to John McCain Identify Bad Advice & Uninformed Arguments Why You Should Learn How to Make Informed Judgments? Return to menu

5 B. Simon Johnson  Ronald A Kurtz Professor of entrepreneurship, MIT  Senior Fellow at Petersen Institute for International Economics  Member Congressional Budget Office’s Panel of Economic Advisors Identify Bad Advice & Uninformed Arguments Why You Should Learn How to Make Informed Judgments? Return to menu

6 Chris Whalen  Vice President and Managing Director, Institutional Risk Analytics  Appeared before the US Congress and SEC to testify on various issues  Appears regularly on venues such as Bloomberg Television and CNBC Identify Bad Advice & Uninformed Arguments Mr. Whalen told the NewsHour audience that capital is the cash cushion banks put aside in case of defaults. Why You Should Learn How to Make Informed Judgments? Return to menu

7 Identify Bad Advice & Uninformed Arguments “I thought banks were reporting profits. How can they simultaneously be losing money? Because the profits or earnings are being reported before subtracting the loan loss reserves.” Paul Solman Regular NewsHour correspondent Why You Should Learn How to Make Informed Judgments? Return to menu

8 For mark-to-market “The new standards force companies to value or "mark" their assets according to a different set of standards and levels. The rules are complicated and arcane; the result isn't. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.” Against mark-to-market “Any move to abandon, or soften the impact of, mark-to-market accounting ignores the reality of the credit crunch. It was brought on by bad lending, coupled with insufficient capital. An accounting "fix" won't change that. It may make matters worse. The freezing up of credit markets is largely because investors and banks don't trust one another's books. As Federal Reserve Chairman Ben Bernanke noted in congressional testimony last week, eliminating mark-to-market accounting could further undermine investor confidence.” Evaluate Competing Arguments Bad accounting Rules Help Sink AIG, Zachary Karabell, Wall Street Journal, September 18, 2008 Don’t let Bankers Run the Asylum, David Reilly, Wall Street Journal, October 1, 2008 Why You Should Learn How to Make Informed Judgments? Return to menu

9  Make decisions as a preparer of accounting reports  Measurement  Recognition  Classification  Disclosure  Evaluate preparers’ decisions as a user of accounting reports  What is the measurement objective of each reported number?  How relevant is this objective to my decisions?  How reliably does the number measure this objective?  Assess the confidence you should have in these judgments Make or Evaluate Accounting Decisions Requiring Judgment Why You Should Learn How to Make Informed Judgments? Return to menu

10 Decision Making Hierarchy  Outside of companies:  Congress  SEC  FASB  EITF  Inside of companies:  Board  CFO  Division controllers  Record keepers Media Voting publicSpecial interests Education Return to menu

11 Characteristics of Informed Judgments  Continuum of informativeness  Judgments are more informed to the extent they are …  based on analyses that identify and rigorously examine competing alternative hypotheses  using empirical evidence, compelling logic, and/or broadly accepted theories Return to menu

12 Closing Thoughts  The controversy over the role of mark-to-market accounting culminated with the Chairman of the FASB being grilled relentlessly by congress in March, 2009 and the FASB significantly amending related standards one week later.  This situation vividly demonstrates the dire consequences for accounting and capital markets of uninformed judgments by the media, powerful special interest groups, and politicians.  Good arguments on both sides of this important debate were drowned out by uninformed arguments by powerful interests that often seemed more motivated by self interests than by facts, logic, or accepted theory.  One way to counter these forces is to educate ourselves and the public about accounting judgments and their consequences for both preparers and users of financial statements. Return to menu