Recognizing the increased need for accounting expertise in investment management, Columbia Business School has launched a new master’s degree program in accounting. The Master of Science in Accounting and Fundamental Analysis degree will consist of three semesters of coursework in the fall, spring, and summer, with a reduced workload in the summer to accommodate “a practically oriented thesis, which may be part of an internship,” explains Stephen Penman, the George O. May Professor of Accounting, co-director of the Center for Excellence in Accounting and Security Analysis, and creator of the new program’s curriculum.
This thesis work will deal with “the real, substantial valuation problem of carrying out a very thorough fundamental analysis on a sector or group of companies,” he says. Here, Penman explains the purpose of the program and the importance of understanding accounting in business today. Why did the School decide to create this program? There's quite a demand out there for people to do more [fundamental analysis] in investing — to understand how the accounting is important, how you’ll handle financial statements. It involves analyzing businesses and the value they can generate, but specifically applying accounting information and the financial statements to do so.
[This is] important for active fundamental investment managers, equity analysts at investment banks, buy-side investment funds, hedge funds, private equity, and consulting. [At Columbia Business School], we have a particular expertise in fundamental analysis. This program very much complements the Value Investing Program and is related to it. [So, with this program], demand and supply come together. There is no program that we know of in the world that is like it. It's innovative. We're very proud to be the first on the block with this.
What do students in this program get out of it? It's similar to the other master’s programs we have in the School — a Master of Science in Marketing, a Master of Science in Financial Economics, and a Master of Science in Management Science and Engineering. These are not standard master’s programs— [they are] actually halfway between a ‘regular’ master’s and a PhD. The students coming into these programs, including our program, take the same seminars that our PhD students take in their first two years. They get in-depth exposure to the research behind the tools they will use so that they can apply them more confidently. They also cover econometrics and statistics at a PhD level, so they'll be very much equipped to apply the research.
However, it won't be like a PhD student who then goes on to create his or her own research expertise and becomes a professor. Rather, the graduate of the MS in Accounting will go out and engage in practical investing. The emphasis is on applying tools to in-depth research on firms, equity investments, credit investments, and so on.
What are some of the common corporate issues that a graduate of this program will be able to address? Well, for example, there's a question of how you handle fair-value accounting. Say it's 2007 and the banks are raising the fair-value estimates of their mortgage assets because the price of real estate has gone up. It looks like people have more equity in their homes, so the mortgages are deemed to be worth more. But that is dangerous if it is due to a real-estate bubble, which may burst. Fair-value accounting brings bubble prices into the balance sheet — it’s “water in the balance sheet,” as fundamental investors say. Enron was basically a fair-value accounting house of cards.
That's just one example. More generally, one has to ask: how do the financial statements indicate value — or not? Here’s another example. In terms of recognizing liabilities for pensions, the accounting is very detailed. There are many traps in handling that accounting. Take depreciation: is the depreciation consistent with economic depreciation, or is it sort of an arbitrary number? There are many aspects of US GAAP accounting and international accounting standards (IFRS) that have problems, but there are also aspects that are really quite informative if you understand.
Investors need to be aware of this. In business schools and economics departments we talk about revenues and costs, investments, and indebtedness, among many other concepts relevant to business analysis. These are abstractions, very good to promote your thinking, but in the end, the rubber hits the road with measurement. That's accounting: how you actually capture these things. Accounting, to capture things well, is very difficult in the real world. If you handle accounting numbers in a disciplined way, you actually get some really good insights.
###