Whit Broome: Teaching Future Lawyers the Language of Business
|"It is important for lawyers to know what financial accounting and financial statements do and do not represent."|
Whit Broome, Frank S. Kaulback Jr. Professor of Commerce at the University's McIntire School of Commerce, enjoys teaching the conceptual framework of accounting and the content of financial statements to Law School students. "Business and finance become more challenging every year. Contracts become more complex. It is important for lawyers to know what financial accounting and financial statements do and do not represent," he said.
"Lawyers who are going to handle the practical dealings of their corporate clients, such as IPOs, regulatory filings, and financial disclosure documents, need to understand the financial accounting framework and terminology to do their jobs," he explained. "When lawyers understand the context and terminology of the statements," Broome added, "they will be able to work more comfortably with them and squeeze more information from them."
According to Broome, financial statements serve two main functions: the first is to serve as a check on the stewardship of management-a means of evaluating past performance; the second is to serve as a basis for making decisions by using the statements as a guide to future performance. "A company's past actions provide guidance for future decision making-when one knows how to read and analyze the statements."
"Although some students can be number-phobic," said Broome, "the Law School students I teach are very serious about gaining a knowledge of financial accounting and reporting. They know that this knowledge is crucial to practice in business. I don't teach the Law students bookkeeping or the debits and credits used in accounting. For future lawyers, it's more about knowing how to interpret the financial statement numbers and knowing the methods used to derive them," he said. The person who knows how and why assets, liabilities, revenues, and expenses are represented on financial statements will have the strategic business advantage.
The 75 students taking Financial Accounting this semester are spending time on General Mills's hardcopy and online financial statements. Broome asks the students to analyze the statements and derive important information, such as what are the company's major sources and uses of cash for the year. The class is discovering that General Mills's statements and notes from the past year are particularly interesting since the company just acquired Pillsbury for $9.7 billion.
As the business environment becomes more
complex, financial statements will contain even more information.
How does a company account for complex issues and financial instruments?
If one looks at Enron for instance, and what Broome terms its
"very complex corporate transactions and entities,"
neither the attorneys nor the CPAs seemed to understand the full
ramifications of the company's actions. "You've got to protect
yourself by being able to understand and analyze financial statements
and the notes to them," Broome added.