In an era of full disclosure, what about cash? Given the ever-mounting investor interest in cash flows, companies should be making a concerted effort to provide such information in their quarterly earnings releases.

• Author: Randerson, Erik
• Position: Corporate Finance - Cash flow management

Charles W. Mumford, author of The Financial Numbers Game: Detecting Creative Accounting Practices, was clearly on to something when he wrote that "profit is an opinion, but cash flow is a fact." Indeed, there are countless examples of growth companies that generated impressive increases in earnings per share for a sustained period while operating cash flow was negative or negligible before suffering catastrophic earnings disappointments, costing shareholders billions of dollars in losses.

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Lucent Technologies and Nortel Networks Ltd. come to mind as former telecom high-fliers that reported a string of better-than-expected earnings that far exceeded underlying performance in operating cash flow. In each instance, the companies imploded when the telecom industry stalled and their stretched balance sheets became too much to handle, resulting in billions of dollars in writedowns of inventory, accounts receivable and other charges.

Wall Street was taken by surprise, in large part because the companies' cash flow statements--where the warning signs existed--weren't released until weeks after their quarterly earnings press releases (Lucent also did not include a balance sheet in its quarterly earnings releases at the time). Consequently, investors reacted positively to the limited available information each quarter. To their credit, today both Lucent and Nortel each issue a full income statement, balance sheet and cash flow statement in their quarterly earnings releases.

What is striking, however, is that Lucent and Nortel remain the exception in corporate America. According to PR Newswire, just 39 percent of Fortune 500 companies issued a cash flow statement in their earnings press release during the first quarter of 2004, albeit a modest improvement from 35 percent a year ago. The percentage is believed to be far lower among small- and mid-capitalization companies.

In light of the considerable advances in disclosure practices in the post-Enron era--Regulation Full Disclosure, The Sarbanes-Oxley Act, accelerated 10-Q filings, disclosure committees, etc.--it is counterintuitive that corporations still withhold such a material measure of business performance.

Lou Thompson, president and CEO of the National Investor Relations Institute, notes that NIRI's Standards of Practice for Investor Relations "recommends that corporations provide a cash flow statement in their earnings press release whenever possible. Investors clearly...