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I'm Steve Coburn executive director of
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Wharton digital press and today I have
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with me Richard Lambert who is the
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Miller sherid professor of accounting at
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the Wharton School and author of Finance
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and Accounting Essentials in the Wharton
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Executive Education Essentials series
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good afternoon Rick good afternoon let
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me start by asking you does every
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manager really need to understand
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financial data don't they have staffs of
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Finance people and accountants to handle
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that uh they often do have staffs of
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Finance and Accounting people to handle
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some of it and it's a good idea for them
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to communicate with the finance and
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staff people but they have a different
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job than finance and staff people the
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job of a manager is to use the
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information uh the job of the Finance
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and Accounting people is to produce that
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and so to use it well you have to
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understand what's in the numbers what's
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not in the numbers what do the words
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mean uh all those kinds of things uh
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what's the biggest mistake that managers
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make when they try to use financial and
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accounting data well I'm not sure there
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is a biggest mistake I think there's
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actually two extremes one is I don't
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know know what this is and so I'm not
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going to pay any attention to it and the
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other is the exact opposite where they
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fixate so much on the bottom line that
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anything that makes the bottom line
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higher must be good and anything that
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makes the bottom line lower must be bad
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and both of those are
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mistakes in the book uh Finance and
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Accounting Essentials in the Wharton
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Executive Education essential series you
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talk a lot about the ambiguity and
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subjectivity of accounting and financial
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data but aren't numbers objective how
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can numbers be subjective and
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ambiguous uh numbers are objective uh
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what the number is supposed to represent
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though is subjective uh a lot of what
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goes on in accounting and finance is
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implicitly predictions about the future
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because we have to put together the
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financial statements while a lot of
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activities that we have begun haven't
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yet had all of their future consequences
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play out we may have made sales but we
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haven't collected them all we may have
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made Investments that are going to last
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for a long time and so what are they
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going to be worth later uh we may have
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estimates for what pension expenses are
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going to be all those kinds of things so
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almost every number in a financial
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statement is actually based on
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somebody's estimate of what things are
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going to be in the future and that leads
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to ambiguity and subjectivity that leads
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to ambiguity and subjectivity because
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nobody has a crystal ball that knows
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what what the future is going to be so
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it's your best
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guess also because there's that
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subjectivity it opens up the door for
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manipulation too and so that's a big
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part of accounting uh and interpreting
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the accounting numbers in your book you
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talk a lot about benchmarks what do you
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mean by benchmarks and give us some
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examples so a benchmark is something to
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compare a number to so if profits were
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$50 is that good well is it good
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compared to what so one benchmark might
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be compared to how much you invested to
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make the $50 another Benchmark might be
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what did you make last year so that we
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could look for improvement and those
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kinds of things and a third Benchmark
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would be what are other divisions or
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what are competitors doing uh all of
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those are good to help gauge is your
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performance really good or or not in
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your book you caution manages against
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using numbers develop for external
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reports for example stockholder
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statements actually run the business
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why wouldn't I want to do that aren't
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those good solid
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numbers well there's really two reasons
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one is the level of aggregation the
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numbers that are reported to the
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stockholders are for the firm as a whole
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and really to be a good manager you need
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to know how the parts of the firm are
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working it could be a good year for the
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firm but that doesn't mean that every
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part of the firm did well and so you
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want to know where do we did well where
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we didn't do well so that we can go in
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and make revisions and change our
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strategy and try to the best this and
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invest more in this and those kinds of
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things but the other reason is that the
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rules that you're required to use to put
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together the financial statements to
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send to shareholders often aren't really
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the best gauge of how your business is
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doing and a good example is that of that
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is that there are many things that are
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investments from an economic perspective
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that get expensed that they reduce your
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profits in the year that you do them uh
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things like research and development or
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investment in training or those kinds of
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things and so doing those are is good
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for the company but they will actually
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make your profits lower in the year that
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you do them and so you don't want to
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just focus solely on that number to make
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good long-term decisions one of the
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other interesting things in your book
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Finance and Accounting Essentials in the
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Wharton Executive Education essential
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series uh is you argue that managers
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really need to get into the footnote
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a financial statements those seem dense
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and difficult why do it the footnotes
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are dense and and uh difficult uh and
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and that's actually why they're valuable
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the footnotes tell you how the numbers
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were calculated so if you see the
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profits are $50 it's important to know
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how that $50 was calculated because it
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could be good it might not be good uh
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how aggressive how conservative the
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accounting methods were to be used used
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to calculate that $50 number will be
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explained in the footnotes and so it's a
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really good source of information to
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figure out what the numbers really mean
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Rick let me ask you why you wrote the
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book well we wanted to reach a broader
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audience than we teach with our usual
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communication mechanisms teaching in the
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MBA program and teaching executive
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education classes um we wanted to write
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a book that was readable we wanted to
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write a book that was relevant to
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managers and we wanted to write a book
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that used a lot of real world examples
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so that you could see how to apply the
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information that the accounting and the
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finance people provide to you Rick what
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can managers do to make sure they stay
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on top of costs I think of the problems
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the automobile companies had GM in
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particular with Healthcare is there a
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way that managers can look forward can
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stay on top of cost and not be surprised
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well there I think a couple of ways one
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is to make sure you know what the costs
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are and so having reports available that
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indicate that what your costs are what
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the breakdown of the costs are uh is an
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important thing another thing is to
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recognize that not all costs are
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incurred in the form of cash right now
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and health care and pension benefits are
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a good example of that many of them
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represent cash outlays that you're not
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going to pay into the future and so if
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you're running your business on a cash
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basis you might not count those because
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they're not being checks written today
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for them nevertheless you have to be
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aware that you've got incurred the
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obligation to pay this in the future and
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uh take those into consideration in
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making your operating decisions Richard
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Lambert thank you very much for for
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being with us today thanks for having
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me
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