GMI Analyst: ESG and Accounting Metrics for Investment Use: Prepaid Expense/Operating Expense

The following summary appeared as part of Governance Metrics International’s GMI Blog. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.

[A very useful metric used by GMI–] “…Large prepaid expenses can indicate problems with a company’s expense recognition. A company may erroneously record operating expenses as a prepaid expense asset, thereby artificially decreasing operating expenses and boosting current income. This is one of many techniques by which companies can convert operating expenses into assets in order to boost current earnings. GMI Ratings’ Prepaid Expense/Operating Expense metric flags companies where these issues may warrant heightened investor scrutiny.

GMI Analyst’s Prepaid Expense/Operating Expense metric identifies companies whose Prepaid Expense/Operating Expense ratios are in the highest quintile of their industry peers….Large prepaid expenses can indicate problems with a company’s expense recognition.”

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