Earnings Quality & Fundamental Analysis

Financial reporting provides a window into a company’s operations, performance and financial position, but turning financial statements into actionable insights is challenging. Success requires not only an understanding of accounting principles (GAAP), but also the ability to assess reporting quality and apply analytical tools to evaluate profitability, risk, growth, and value. The course begins with a brief review of financial reporting fundamentals before turning to modules on fundamental analysis, including earnings quality, performance evaluation, risk assessment, forecasting, and valuation. The remaining class sessions—approximately 14 out of 24—are devoted to a deeper exploration of the reporting and analysis of key transactions (such as business combinations and leasing) and major financial statement items (such as revenue recognition and income taxes). Throughout, the emphasis is on applying these tools to real-world decisions in investing, lending, and corporate management. To allow for dynamic progress, the time devoted to each topic is flexible: (please see syllabus) The following figure presents the framework: (please see syllabus) The primary objective of this course is to develop a deep understanding of accounting information and how to use it intelligently in making investment, credit, and other resource allocation decisions. These skills are essential for investors, consultants, analysts, bankers, executives, and others who rely on financial statements to make informed judgments. As Warren Buffett emphasizes in this video, the ability to interpret financial reports critically is central to sound investment decisions. While the course introduces the theoretical foundations of financial analysis, its primary focus is on real-world application. Students will work with actual financial disclosures, analyze cases of accounting abuse, and perform valuation exercises using Excel-based tools provided in class. These hands-on analyses develop the ability to assess the assumptions and accounting choices behind reported numbers, make earnings-quality adjustments that improve consistency and comparability, detect red flags and potential distortions, and apply fundamental valuation techniques to evaluate firm performance, risk, and value. Drawing on insights from both practice and research, the course provides a rigorous and practical toolkit directly applicable to careers in investment management, equity research, consulting, and corporate finance. In a review conducted in 2011, the committee for evaluating elective courses concluded that “this is an excellent, carefully constructed course which provides students with valuable insights and lasting concepts.” In the same year, Professor Nissim won the “Dean’s Award for Teaching Excellence” for developing and teaching this course. Since then, the course has been continuously updated, with major revisions in 2022 and 2025. The following is a recent email from an alumnus that audited the class: “I really want to Thank You for letting me audit your course. I don’t understand why this is not a mandatory course in the Value Investing program. All of us learn lessons that you are teaching the hard way – by losing money, because no one taught us all this. Every single mistake I made, you covered in the class. It is very important for people in the Value Investing Program to know all this. The capital they lose in their initial years (when they are young and learning all this), if not lost, will make its way into the business school endowment eventually, after compounding. … Thank you for your dedication. You are also the only professor who covered as much material as possible and was really dedicated with the content of the course.” The following is a recent email from a student: “I just wanted to thank you again for the great semester … I loved my internship and I’ve already accepted my offer to return to …. Your class was the best preparation I had for investment banking. All of the normalizing adjustments and deep dives into line items really helped me succeed because several times during the internship I was called on to make considerable accounting adjustments to make companies more comparable for comparison and had I not taken Earnings Quality I would not have been as prepared to handle the assignments. I was better at my job because of your course so I really wanted to express my gratitude for all the time you took creating your presentations and answering questions.”