Does the way you report a profit matter?

If you're a shareholder in the Commonwealth Bank (CBA), the answer seems to be yes. They announced yesterday that they would be coming into line with their peers and excluding from profit unrealised gains and losses on derivative securities used for hedging. This resulted in a big sell-off, on the expectation that CBA were sitting on big losses from their derivatives. Richard Gluyas reports in The Australian.

Turns out that CBA is sitting on a small unrealised profit, not loss. And the shares jumped back up.

Part of the problem is the lack of guidance in the accounting standards. From the first linked article:

Chief financial officer David Craig said in the announcement that the bank had examined the definition of cash net profit after tax used by its industry peers and analysts, given that accounting standards provided no guide on the components that should be included.

CBA, he said, had decided to adopt "emerging industry practice", excluding unrealised gains and losses on derivatives used for hedging purposes.

What happens if you get your audit wrong, then?

Well, if you're PWC and you did the Tyco audit, a fine of about $225million is the result: The Australian. This is an example of why research (especially audit research from the United States) assumes that the fear of litigation will help prevent auditors knowingly signing off on financial reports that don't comply with GAAP (the accounting rules).