THURSDAY JANUARY 28, 2010

The Accuracy of a Weatherman

You have heard of the Chief Executive Officer (CEO), the Chief Operating Officer (COO), and the Chief Financial Officer (CFO); now meet the CMO, the Chief Meteorology Officer!


 Yesterday, the Securities Exchange Commission announced that companies must consider the effects of global warming and efforts to curb climate change when disclosing business risk to investors.  The guidelines will require companies to weigh the impact of climate-change law and regulations, both domestic and international, when assessing what information to include in corporate filings.  So, for example, an insurance company will need to quantify the physical impact of rising sea levels due to warming and increased floods associated with more frequent hurricanes.

 

What a relief!  The SEC has addressed one of the more pressing issues in financial accounting.  Every investor who uses financial statements knows that the one missing ingredient needed to provide clarity and accuracy to the data is…a weather forecast!  After all, we all know how accurate the local weatherman is!  And of course, we know with absolute certainty that sea levels will rise and hurricanes will be more frequent.  Will companies be required to incorporate the National Hurricane Center’s forecast into their financials each year or will companies hire their own CMO?  Will the presence of El Nino be a factor in earnings projections?  How would the accounting work?  Would the insurance company that projected losses based on the hurricane forecast need to reduce its loss reserve if the number of hurricanes is less than forecast?  Would Home Depot need to take a charge for an overly optimistic forecast for plywood sales?

 

Financial accounting rules are meant to bring clarity to a company’s financial well-being so investors can make educated decisions.  Whether one believes in man made global warming or not, it should be clear that we have little ability to accurately forecast the weather, let alone the weather’s financial impact on a company.  These rules will politicize financial reporting and create more uncertainty.

 

It makes one question the priorities over at the SEC. Maybe they should focus more energy on the Bernie Madoffs of the world?  Or consider whether mark-to-market accounting rules helped speed the onset of the economic crisis?  Maybe the SEC will next direct companies to consider the impact of Astrology forecasts.  Why not, the astrologers have a better track record than meteorologists!  But these would be  a silly allocation of resources.

 

Finally, while acknowledging that I have little training in weather forecasting, I am willing to go out on a limb and suggest that if a gigantic meteor hits the earth, there will be no need for financial reporting!

POSTED AT 1899-12-30 14:22:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.