Limitations & Criticisms

6.1 Limitations of Traditional Financial Statement Analysis

1. Historical nature: Ratios are based on past data — may not predict future performance.
2. Inflation distortion: Balance sheet values at historical cost understate real asset values during inflation.
3. Window dressing: Firms may manipulate accounts before year-end (e.g., delaying payables to inflate current ratio).
4. Seasonal businesses: A toy company's December balance sheet looks very different from March — misleading snapshots.
5. Comparability problem: Different depreciation methods, inventory valuation (FIFO vs LIFO vs Weighted Average) make inter-firm comparison difficult.
6. Non-quantifiable factors ignored: Brand value, employee morale, customer loyalty, pending litigations not fully captured.

6.2 Limitations of Social Accounting

1. No universal standard for measurement — social costs are subjective.
2. No mandatory reporting framework (except BRSR for listed companies).
3. Companies may engage in greenwashing — cosmetic social reporting without real impact.
4. Difficult to monetise social benefits (e.g., how to value a clean river?).

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