The title of this article should be 20% of Corporate America Admits to Cooking the Books. Virtually every public company has the ability to misrepresent their earnings. They squirrel away reserves during a good quarter and release them during a bad quarter. The shit hits the fan when they have more than 2 quarters in a row of poor earnings. The Wall Street banks are criminal in their manipulation of their books to appear profitable. Their assets are overstated by 30% and they have released loan loss reserves for the last two years to create phantom earnings. No public company can be trusted. The FASB and the SEC are a joke. The public accounting firms are bought and sold by the mega-corps. Trust no one.
20% of Corporate America is cooking the books: study
The RBC strategist said the 10% deviation should really call into question why Wall Street gets so excited when a company beats or misses earnings by a penny a share.
At the end of the third quarter, about 78% of S&P 500/quotes/zigman/3870025 SPX +0.28%companies providing an earnings outlook said they’d miss the Wall Street consensus. Read more on third-quarter earnings outlook gloom, and other metrics to consider.
“We should focus on other metrics like cash flow,” Zyblock said. “Cash is cash.” See: 5 companies whose cash flow tells the tale.
In the survey, titled “Earnings Quality: Evidence from the Field,” researchers at Emory University and Duke University surveyed 169 chief financial officers at public companies and conducted 12 in-depth interviews with 12 CFOs.
The complete study can be found here.
Some of the other key findings in the study include:
- About 50% of earnings quality is affected by non-discretionary factors.
- CFOs surveyed believe that 60% of earnings management increases income, and 40% lowers income.
- The most-cited red flag by CFOs to look for earnings manipulation is that earnings are inconsistent with cash flows, such as weak cash flows, or earnings strength with a deterioration in cash flows. The next most cited red flags were earnings deviation from industry norms, and unusual accruals.
- The five top reasons companies misrepresent earnings according to CFOs are (1) to influence the stock price, (2) outside pressure to hit benchmarks, (3) internal pressure to hit benchmarks, (4) to influence executive compensation, and (5) because senior managers fear poor earnings performance will hurt their careers.
– Wallace Witkowski