Microsoft's Financial Reporting Strategy

Finding the perfect balance of a company’s financial reporting strategy is one of the most difficult actions that a company must face. By following Generally Accepted Accounting Principles (GAAP), making several of these decisions should be easier. However, reporting strategies are not always a “one size fits all” way for companies to complete their statements. Having a planning resource strategy to specifically address the needs of your company is most effective in following the guidelines of the Security and Exchange Commission (SEC).

Creating a company specific financial reporting strategy takes time. As a business and its strategies adapt, so must the reporting and data needs as well (Gerrits, 2014). In starting a new company, a plan is usually made, but changes to this plan must be adapted to the growing business. As is the case with Microsoft, the company and its growth potential increased exponentially over a few number of years, therefore the pressure to show growth in numbers to investors escalated as well. Executives must realize that what once worked for the company may no longer work and a new plan to financial reporting must be devised.

Upon this revision of reporting strategies, successful companies will usually struggle with their newfound success. This success can then lead to earnings manipulations which lead to inaccurate financial statements. A company will show growth over a certain period of time, their stock soars and their earnings per share (EPS) is then estimated by Wall Street executives as a way to show how a company’s stock is performing. The company is then pressured into maintaining or meeting the EPS numbers to gain investors or to raise stock value. However, if the company cannot maintain the level of success that they have shown over a number of years, they then turn to earnings manipulations to meet their expected EPS.

Earnings manipulations is essentially the acceleration or deferral of expense or revenue accounts in order to keep up with this expected growth (Schacht, 2011). This is exactly how Microsoft came under the watchful eye of the SEC. In order to keep up with their expected progress, they smoothed over accounts in order to show increased earnings among actions that were being reported. Without this fluctuation in numbers, the gain of investors of their stock will grow as their financials show steady numbers year over year.

Microsoft was soon showing a difference in their market value of equity versus their book value of equity. There are possibly several factors that can lead to this difference in numbers. Market value of equity is the total dollar or value of all of a company’s outstanding shares. The market value of equity is calculated by using the company’s current stock price by its number of outstanding shares. Whereas book value of equity is determined by using the original value of a company’s common stock adjusted