Criticism of the Accounting-Based Measures of Performance

Abstract

The traditional accounting-based metrics are not consistent with value creation and do not handle any of the four factors (i.e. investments, cash flows, asset’s economic life and cost of capital) on which value depends. Therefore, managing for short-term earnings compromises shareholder value. In this chapter, the fundamental shortcomings of the accounting-based metrics are discussed, focusing on the following aspects: subjectivity of the accounting figures, inconsistency with the goal of maximizing shareholder wealth, and short-termism of managerial decisions.