Just like John, so many people have failed to see the importance of financial analysis of “efficient capital market” as it will be a waste of resource since the needed information is there for all participants. Perfect market implies that the same expectation on securities are with all participant, this may not be true as trade only occur when there are heterogeneous expectations. There is no explanation on those players who end up being the best profit making, why not equal profit for all participants? The answer to this question and many more shows that there are anomalies of the efficient market that would require proper financial analysis. Financial analysis offers differential insight that help investors know how to perform portfolio management required for trading profits. It helps identify the taxed portfolio that will be profitable to the business. With financial analysis, investors are able to make a precise decision on resource allocation that would be very costly if inefficiently allocated. Only insightful financial analysts can precisely do this. Among many other reasons, it is possible to conclude that there is a serious need for financial analysis in the perceived efficient market.
The occurrences of the seven major crises in the financial market in a period of twenty years show that, the efficient market hypothesis is not realistic. There is a need for a clear and effective financial analysis to solve the problem. Dates of the crisis and the indicators can be clearly establish from economic levels, but the contributor of the crisis remains silent. Proposal by financial analysts to avert the crisis is on the corporations to provide their attitude on risk to help assess systematic vulnerability of companies. There is a need for corporations to disclose annual reports on the potential risks. For the aversion to take effect, the political good will is required to act on the disclosed evidence. With a strong, independent, and courageous regulatory body, looming disasters disclosed in time and effective evasive action taken to curb possible crisis. The world needs a well-built culture of independent regulatory bodies in place to have a better financial market than the one in the last twenty years.
Generally accepted accounting principles have set standards used in the financial report however, the financial reports had always had mistakes when being reported. If the mistakes are deliberate then it becomes fraud whereas when it is not deliberate, it is an error. Inadvertent errors are in three major categories: incorrect interpretation, wrong application of GAAP, and math mistakes.
- When facts are not interpreted correctly
Accountants sometimes misinterpret the available information. Accountants misuse some facts by either undervaluing or by overvaluing. For example, recording salvage value at $10000 when its actual value is $5000.
- Move from non-GAAP to GAAP accounting principle
Switching from non-GAAP to GAAP principle of accounting is an error. For example switching to the method from cash method by a company can is an error.
- Calculation errors/math error
Wrong calculation of the financial figures may result to erroneous reports by accountants. An example is when adding twenty items and forgets one in the process the result will not be accurate.
- Incorrect recognition
This occurs when the company does not accrue revenues or expenses properly, which result to a wrong presentation of transaction in the financial books. An example is recording expenses in a balance sheet instead of the income statement