CPAs, Fake News, and Financial Literacyby
As a CPA with professional experience, academic experience, and a track record of providing objective and quality information to a wide variety of media outlets, the perspective brought to the concept of fake news applies to the dollars and cents that drive business decision-making on an individual and organizational level.
Fake news and the implications of fake news have been getting a lot of media coverage recently, and that is for good reason. Individuals, consumers, and investors rely on the media to provide unbiased, accurate, and timely coverage and analysis of current events.
Additionally, and arguably more important to the fundamental role of media in society, is the context of the stories. Put simply, media, news, and the analysis or commentary that always accompanies news stories play a critical role in helping people understand what is important, what is white noise, and what the story means for them.
While fake media stories to date have not primarily focused on business news and events, the implications for investors and individuals are significant. Whether you are looking to select an individual stock to invest in, evaluating mutual funds, or simply trying to understand what the headlines mean for you, understanding what news is fake, or junk, is essential.
So, being able to accurately interpret and process this information, for personal and business decision-making, is an important topic that CPAs can offer valuable insights and advice on to help individuals make better decisions. Just like junk bonds (debt) might look good at first and provide nice returns for a while, by definition they are junk – let’s cut through the junk and get to the story together.
GAAP vs. Non-GAAP
One of the biggest areas that can cause confuse and be categorized as junk news by investors is the difference between GAAP and non-GAAP earnings.
Without getting too technical and translating this issue for a broad potential client base, GAAP earnings and results are the numbers governed by accounting regulations and standards. Non-GAAP earnings, to the contrary, are earnings results that can be different from GAAP earnings, and here is where the true story can be overshadowed. Traditional earnings figures, including income, earnings per share, and revenue information, form the basis that drives investment recommendations, buy vs. sell ratings, and how individuals will perceive the organization. Non-GAAP earnings are not guided or driven by the same standards, which provides more flexibility to tell the narrative of the organization.
Such flexibility can be great, but it might also lead to investors misunderstanding the financial position of the company. Remember Pets.com?
For example, if an organization is focusing purely on growth, customer acquisition, and expanding brand awareness, those are metrics that management will try to emphasize in place of reporting income levels. While such data and information might be impressive at face value, investors and individuals need to know the real story. Revenue, profits, and other financial information are what drive business, and that is what you need to focus on when reviewing business news, but there are other areas that you might want to focus on.
When analyzing news, headlines, and other business stories, it is important what context this news is presented in. Just like a football team might score more points than the other team in a given quarter, the ultimate goal of the game is to score more points overall. CPAs and other accounting professionals are uniquely well-positioned to not only interpret this variety of data and information, but also explain it to clients, customers, and other end users.
Other News to Watch
Business news and headlines, especially volatility in the stock market, are driven by how certain numbers and results compare to expectations. Think of it this way: If the expectation is to earn a 70 on a test, and the result is a 75, the actual results have exceeded market expectations. But at the end of the day, you still earned a C on the test.
This exact same concept applies to watching and interpreting news headlines and the results that are posted, discussed, and analyzed in the news media. If you are thinking of making an investment in a company, mutual fund, or any other type of business activity, you have to make sure the results you are looking at are fair and balanced with regards to expectations – past and present.
A similar scenario might play out with stocks and other investment opportunities – it’s always important to cut the junk news and numbers from what really matters. If a stock seems hot because it has beat earnings expectations consistently, make sure those expectations are accurate.
Credit cards and financing options are another area where it is especially important to cut through headlines, bold letter offerings, and other potentially misleading information.
For example, a 0 percent introductory rate might sound great, and while this would not be fake news, it might be misleading and potentially lead you to make additional purchases. While this introductory rate is certainly appealing and real, it will eventually roll off and leave you paying higher interest payments over time. This might be especially important for consumers if only minimum payments are made – this will lead to ever-increasing balances, interest payments, and even credit cards fees.
Put simply, whenever applying for a credit card, mortgage, or lease, it is always important to read the fine print, and make sure to understand the details of whatever you are getting into.
What it Means for You
Junk news, fake news, misleading news, or whatever other label you want to give it is everywhere and increasingly present both on television and social media. Specifically in terms of finance and business decision-making, it is critically important that you are able to separate the junk from the real news.
Whether it is stock market news, business news in general, personal finances, or making investment decisions, you need to be able to objectively evaluate what you are reading and hearing. Pay attention, read the fine print, be sure to take the information in context, and you will cut through the junk and make the best decisions for you and your clients.
Sean Stein Smith is a professor at the City University of New York – Lehman College. He also is the chairperson of the NJCPA's Emerging Technologies Interest Group (#NJCPATech). He serves on the Advisory Board of the Wall Street Blockchain Alliance, where he co-chairs the Accounting Work Group. Sean is on the Advisory Board of Gilded, a...