Understanding Corporate Annual Reports: A User's Guide
by Brian Stanko and Thomas Zeller
John Wiley & Sons, 2003
278 pages
ISBN 0-471-27019-9

Accountants have lost their credibility by abandoning their historic role as sniffers of fraud and misrepresentation in exchange for huge fees from audit clients they help to seem more profitable. The authors of this basic, clear, direct, and admirable book begin with the oft-recited litany of crimes against shareholders. They list AOL Time Warner's gigantic write-off of $54 billion of goodwill generated by when AOL, the cash-starved ISP, bought the cash-rich but staid publisher. They list the Titanics of bankruptcy including Global Crossing and Enron and they examine the plague of restatements of earnings by Xerox, Waste Management, and Trump Hotels. They show how the intelligent person can read annual reports and SEC 10-K statements to discern what companies are really doing in spite of the chicanery of auditors paid by clients to make them look good.

The core of the book is an explanation of how one can see through earnings management. To that end, they discuss how companies will accelerate or delay items to inflate or deflate earnings - dipping into the cookie jar, as they say, and how companies may take what is usually called the "big bath" when they want to fix up overly aggressive earnings management and move financial statements back toward reality.

Authors Stanko and Zeller are both associate professors of accounting at Chicago's Loyola University. Their book is understandable if not encyclopedic. They are too brief on off-balance sheet accounting, a major tactic of Enron Corp. in fooling investors that they were profitable. And the book would benefit from a list of suggested further readings. In future editions, which will hopefully be many, they will probably want to update their reliance on Home Depot's 2000 annual report as a case study. Call this a classic in development and, if you want to brush up your accounting skills, get the book.