Melbourne Accounting Research Seminar - George Foster

The Konosuke Matsushita Professor of Management George Foster from Stanford Graduate School of Business will present a MARS seminar.

Topic:

A Framework for Evaluating the ‘Good Faith' Basis for Management Forecasts

Abstract:

Management forecasts are of high importance to many external and internal stakeholders. This paper provides a five-pillar framework for assessing the “Good Faith” basis of forecasts made by management and the evidence that would be relevant to them. A central part of the framework is having a broad base of information from diverse internal functional areas as well as external information also from a diverse set of areas. The framework was developed initially in a sequence of litigation cases where in each case management and a publicly traded company were alleged by plaintiffs to publicly release “bad faith” forecasts of revenue and income. Extensive evidence is showcased from a high-profile Oracle Corporation litigation that was prompted by a Plaintiff filing alleging misleading “Bad Faith” forecasts by Oracle and three of its senior executives that  was claimed to have “wiped out over $90 billion in Oracle’s market capitalization.” The contextual richness of the Oracle case includes extensive evidence of “sand bagging” by salespeople and a very marked “hockey-stick” pattern of revenue within each quarter. Examples of the application of the five-pillar framework to other contexts are discussed. The framework draws on the management accounting research literature and the accounting and finance capital market research literature.