| Because of the increased interest in understanding the financial condition of our colleges and universities, higher education managers are more willing to compare their own institutions with others. An important source of error in comparing institutions is variations in the recording techniques of institutions. Recording techniques are the internally designated, non-standardized accounting practices that summarize the business and financial transactions of the institution. An institution, for example, may value its investments based either on (a) the orginal cost of the acquisition, or (b) the estimated current market value of the acquisition. If the investments have appreciated over a long period of time, the choice of how the institution values its investments has profound effects on the financial statement and the derived financial ratios which characterize an institution's financial condition. A comparison between institutions using respectively different recording techniques for the same transaction would have no valid basis and would invariably prove misleading. Differences in reported financial condition may therefore reflect differences in technique rather than actual differences in condition.;This Analytic Paper examines the effect these variations have on the key financial ratios of the respective institutions. These key financial ratios are typically the manner in which the financial condition of an institution is understood. This study further develops a standardizing framework that adjusts for the effects of recording techniques on the reported financial condition by restructuring the institution's transaction information into a format that provides the financial analyst with a valid basis of comparison.;The findings of my Qualifying Paper (Methodological Problems in Comparative Financial Analysis in Higher Education...An Exploration. Harvard Graduate School of Education, January 1984) examined the variations in recording techniques among three private peer institutions. The study revealed a significant number of differences in recording techniques that might materially affect the reported key financial ratios of each institution. Of twenty non-standardized, internally designated recording techniques, it was found that eight were shared by all, ten were shared by two institutions, and in two cases, all institutions used different techniques. |
