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Do 20% Of Firms Cheat On Earnings?

Tyler Durden's picture




 

It may come as a surprise (until very recently) to many who watch the flashing red headlines spewed forth by Bloomberg and Reuters terminals as each and every firm manages to coincidentally report earnings within a smidge of guidance (and maintain their 'near-perfect' records of 'sustainable' growth) when all around the signals seem to point to an economy in malaise. However, earnings quality - that ephemeral view of just how manipulated the end number really is - remains critical (in the medium-term, if not the short-term thanks to the headline-reading algos). To wit, Bloomberg notes a recent paper (below) that finds 20% of CFOs will "manage earnings to misrepresent economic performance" with 93.5% admitting it is to influence the stock price. 'Red flag's include EPS inconsistent with cash-flows, unusual accruals, or an industry outlier. Amid pressure to maintain stock prices (and keep a career going), 60% of earnings 'management' is to increase income and of course 66% of CFOs hope for fewer accounting rules going forward.

 

93.45% of CFOs responded the motivation to cheat (our word) was to influence the stock price!!.. and 88.62% to increase their own compensation!!!

 

 

So the next time a CEO/CFO says anything - and it is heralded as something other than self-serving tripe - please read this report one more time!!

 

Full paper below:

SSRN-id2103384

 

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Thu, 10/11/2012 - 15:56 | 2878695 knukles
knukles's picture

Does Jerry Sandusky like little boys?

Thu, 10/11/2012 - 15:57 | 2878702 NewThor
NewThor's picture

We're still waiting on Frank-Dodd to define the word 'cheat',

we will have a solid definition by 2030,

please be patient.

Thu, 10/11/2012 - 15:58 | 2878706 redpill
redpill's picture

This has been happening for decades.

Thu, 10/11/2012 - 16:01 | 2878727 gmrpeabody
gmrpeabody's picture

Only 20%...?

Thu, 10/11/2012 - 16:15 | 2878762 Winston Churchill
Winston Churchill's picture

Really , more likely 20% are honestly stating income.

This is going to be truly epic. Hope we live thru' it.

Thu, 10/11/2012 - 16:34 | 2878820 DeadFred
DeadFred's picture

How do you spot an 'industry outlier' when 20% (only???) are cheating. That's the way to find the extra-ultra cheaters?

Thu, 10/11/2012 - 16:17 | 2878766 ParkAveFlasher
ParkAveFlasher's picture

20% Cheat on Earnings

100% Cheat on Sales by projecting false numbers via creating networks of straw buyers and distributors in export markets

 

Thu, 10/11/2012 - 16:26 | 2878796 Antifaschistische
Antifaschistische's picture

anyone who would say it's ONLY 20% is intentionally being deceptive.   Stretching, manipulating, holding, deferring, assuming happens at almost EVERY traded organization.   I've seen entire floors of AP clerks told to slow roll invoices in the last couple of days of the month, along with dozens of other tactical techniques used to slam a targetted EPS, or to beat it by a cent....and most of these techniques will clear any audit.  I've worked with KPMG a lot and they NEVER ask the right questions with their small army of ignorant junior clods.  (Note: that is only my experience)

 

 

Thu, 10/11/2012 - 16:00 | 2878721 KickIce
KickIce's picture

That would be anytime the average person makes a profit or is able to maintain his/her standard of living.

20% is low balling it.

Thu, 10/11/2012 - 16:03 | 2878731 Bear
Bear's picture

Why tell the truth about anything if it can provide an advantage ... no one will catch you

Thu, 10/11/2012 - 16:07 | 2878744 KickIce
KickIce's picture

No kidding. or more like no one will try to catch you.

Thu, 10/11/2012 - 16:13 | 2878760 FL_Conservative
FL_Conservative's picture

100% of CFO's could care less about the SEC since the SEC doesn't believe in enforcement anyway.

Thu, 10/11/2012 - 16:37 | 2878826 Sock Puppet
Sock Puppet's picture

Are you some kind of "Constitutionalist" too?  Same may happen to you.

Link:

http://freedominourtime.blogspot.nl/2012/10/hes-constitutionalist.html

Thu, 10/11/2012 - 16:06 | 2878743 Unprepared
Unprepared's picture

Dude, the whole point of the Corporate Finance MBA courses is to teach you how to "massage" the key figures, how to standardize earnings (less volatility is headline number = less perceived risk = higher risk-adjusted return calculated by analysts) and commoditize performance.

 

Shit makes me wanna puke.

Thu, 10/11/2012 - 16:57 | 2878865 kridkrid
kridkrid's picture

Now consider this, if MBA schools aren't self selecting enough, imagine the self selecting nature of being good at cheating.  Or better yet, what if you are wired to not even think of it as cheating, because your internal compass just works differently than everyone else.  For the scores of finance people who work for a company, how many rise to the rank of CFO?  Does he get there because he's the best bean counter? 

I remember the first time I saw Enron, the Smartest Guys in the Room... I thought to myself, if I were reading this in a book, I wouldn't believe it.  I would think that the author had an axe to grind, or was just trying to sell a book.  But here I am watching people not just lie, but take such perverse pleasure in the act itself. 

People need to recognize the very real possibility that some large percentage of people who rise to positions of great power, politically, within the business community, at academic institutions, any institution... many of these people got there because of their sociopathic tendencies.  Not only do they lie, we actually make excuses for them for their lies... "he was just being political"... or "it's coach-speak"... "well, he's just spinning it for the press".  No... he is lying.  And he does it well because he doesn't care.  And he's the president or the head coach or the CEO because he's done it his whole life.

Thu, 10/11/2012 - 16:23 | 2878783 Ruffcut
Ruffcut's picture

Only do it the opposite direction during tax times.

Thu, 10/11/2012 - 15:58 | 2878705 chunkylover42
chunkylover42's picture

No, it's closer to 95-100%. 

Next question.

Thu, 10/11/2012 - 16:00 | 2878708 Jason T
Jason T's picture

OT:  bomb scare at B of A in Ithaca NY now.. 

Thu, 10/11/2012 - 16:00 | 2878716 you enjoy myself
you enjoy myself's picture

why cheat when you can legally pull an AZO?  just keep borrowing tons of money to buyback your shares from insiders, rendering you effectively insolvent, and your EPS goes up!  genius.

Thu, 10/11/2012 - 16:02 | 2878719 Trying to Understand
Trying to Understand's picture

But "everybody" does it... around here cash is king and never goes on the books.... no matter how big or small the business is. So now we know we have 'shadow banking' and 'shadow government' and 'shadow business'....

Thu, 10/11/2012 - 16:01 | 2878723 A Lunatic
A Lunatic's picture

I don't need to read 74 pages of anything to know that the market is rigged by liars, thieves, cheaters, debasers, debauchers, and all other forms of douchbaggery.........

Thu, 10/11/2012 - 16:32 | 2878812 blu
blu's picture

And if you did decide to read all 74 pages you might end up having an aneurysm and dying before you finished. So don't even try.

Thu, 10/11/2012 - 16:01 | 2878724 dracos_ghost
dracos_ghost's picture

What is this word "Earnings" you speak of? I thought stocks only depend on QEx.

Thu, 10/11/2012 - 16:01 | 2878726 digalert
digalert's picture

ZH is getting "manipulated"!

I reached this site via proxy

FYI

Thu, 10/11/2012 - 16:05 | 2878741 CPL
CPL's picture

http://www.internettrafficreport.com/

 

Not just north america now....it's back on the move.

Thu, 10/11/2012 - 16:02 | 2878730 thomasincincy
thomasincincy's picture

Tricks and treachery are the practice of fools, that don’t have brains enough to be honest.”
Benjamin Franklin

Thu, 10/11/2012 - 16:04 | 2878735 rguptatx
rguptatx's picture

Yes, 20% of the firms "manage" their reported earnings - what do the remaining 80% do, yo uask. Why, they LIE & CHEAT!

Thu, 10/11/2012 - 16:04 | 2878737 Dr. Engali
Dr. Engali's picture

20% that seems pretty low. I would think a more accurate statement is ...20% of firms are honest about their earnings.

Thu, 10/11/2012 - 16:08 | 2878746 irie1029
irie1029's picture

We have plenty of execs on here why not do a poll?  For one my co. does not cheat... too conservative IMHO.  We abide by IFRS

Thu, 10/11/2012 - 16:27 | 2878799 Jam Akin
Jam Akin's picture

Define "cheat"...

Thu, 10/11/2012 - 16:58 | 2878873 Joe Davola
Joe Davola's picture

Whoa, slow down.  Our first black president is still working on 'is'.

Thu, 10/11/2012 - 18:31 | 2879052 Jam Akin
Jam Akin's picture

True dat...was just trying to discern if our honest man here is naive or full of shit.

Thu, 10/11/2012 - 16:09 | 2878748 Yen Cross
Yen Cross's picture

 This pretty much sums it up. http://media.photobucket.com/image/shell%20game/picassooo1/shellgame.jpg.... Note; the squad car under #2.

Thu, 10/11/2012 - 16:11 | 2878756 Racer
Racer's picture

Why the need for the question mark in the subject line!

Thu, 10/11/2012 - 16:36 | 2878824 blu
blu's picture

Because unknown to most readers here, all ZH posts are supposed to be phrased like Jeopardy answers.

Thu, 10/11/2012 - 16:12 | 2878758 PUD
PUD's picture

pro forma bitchez

Thu, 10/11/2012 - 16:18 | 2878771 q99x2
q99x2's picture

Fuck Yeah they cheat. This is by the NoWorldOrder decree of anarchy. Crimminal activity of elite will not be prosecuted. Its has gotten so bad now that California has Proposition 35 to stop them from sexual exploitation and human traffiking their children off to the Queens Channel Islands.

Do they cheat? Well that's a nice way to put it.

Thu, 10/11/2012 - 16:21 | 2878779 max2205
max2205's picture

What no H/T...I posted this 2 days ago

Thu, 10/11/2012 - 16:23 | 2878782 semperfi
semperfi's picture

No - 99%

Thu, 10/11/2012 - 16:24 | 2878786 Jam Akin
Jam Akin's picture

I'm shocked, shocked to find earnings manipulation is going on here.

Your bonus, sir....

Thu, 10/11/2012 - 16:27 | 2878790 blu
blu's picture

Why would any working CFO admit to cheating? Even anonymously? What's in it for them? Do they take some kind of perverted joy from wagging their BSD in everyones' face?

They must all be sociopaths by now. That's the only possible explanation. They don't care, and they like to watch people vomit.

EDIT: Okay there might be another reason; they are using the survey to cry out for help. They want better regulation and more transparency to prevent them from ... ah fuck it, I'm full of shit. They really are just sick sociopaths in it for the lulz.

Thu, 10/11/2012 - 17:05 | 2878898 kridkrid
kridkrid's picture

They really are just sick sociopaths in it for the lulz.

 

I would bet gold to donuts that at least 50% of the CEO's and CFO's of any fortune 2,000 company are sociopaths.  I'm tempted to suggest a number even higher, but I recognize that I can be prone to hyperbole.

Thu, 10/11/2012 - 19:40 | 2879166 adr
adr's picture

Nearly every CEO I have met is a sociopath. The ones that weren't ended up being pushed into a window seat by the sociopaths that came on board once the company started making money.

One CEO actually asked me to figure out a way to get into NYC on Sept 12 2001. I was supposed to meet him downtown on Sept 12th to help launch a new division of his company, lucky planning for me. As I was watching the tower burn this guy calls my phone and asks if I was still coming. He actually told me it couldn't wait and even though his office was covered with dust, we could just meet at his 5th Ave penthouse.

I actually asked him if he was insane. It was actually a dumb question to ask since he obviously was.

Thu, 10/11/2012 - 21:13 | 2879368 mirac
mirac's picture

Required reading of what we are up against...all the psychopaths rise to the top at the same time.  Think your mayor, your head of the Knights of Columbus, your President, your boss...

 

http://ponerology.com/

Thu, 10/11/2012 - 16:26 | 2878797 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

I'm shocked, shocked that there's manipulation going on in this casino.

Thu, 10/11/2012 - 16:32 | 2878814 Jam Akin
Jam Akin's picture

Jinx

Thu, 10/11/2012 - 17:00 | 2878885 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

I guess my lightbulb went off 2 minutes too late.

Thu, 10/11/2012 - 16:35 | 2878823 the grateful un...
the grateful unemployed's picture

Ten years ago maybe the seminal study done on S&P earnings revealed pretty much the same thing. The use of pro forma earnings, recurring expenses written off as one time costs, was the accounting gimmick, before Enron accounting (off balance sheet) became the standard. Whenever some form of blatant and usually disasterous financial shenaigan is employed, that destroys the company or fund which tries it, then the same thing becomes the financial standard.

LTCM over leveraged (and pretty much established the broken firewall - rehypothecation investment strategy. Too big to fail, because they also did international settlements. So WE had to bail them out. That was before Clinton repealed Gramm Rudmann?

Then of course Enron's off balance sheet games, which was emulated by the USG no less, in the war in Iraq. Now we finance our off balance sheet debt with off balance sheet phony assets (money printing).

Crime really does pay. First you get the medal, then you wait around to see if they take it away. (Mostly they don't) Lance Armstrong was the head of a DOPING organization. Of course the Americans are just that good, they must not be cheating. Hubris is a wonderful thing. 

The pro forma argument is small potatoes now. They have the entire USG (see note above) in there supporting the stock market.  And in the end they'll buy the product, (see GM) in order to help these companies make their numbers. Just buy the dip, comrade, its all good.

Thu, 10/11/2012 - 16:39 | 2878831 the grateful un...
the grateful unemployed's picture

and one more thought, the most damning piece of evidence we can come up with is a survey? are you cheating? duh, of course we are. we cheat more than the US olympic cycling team.

Thu, 10/11/2012 - 16:40 | 2878837 max2205
max2205's picture

Btw it's a violation of SARBANES OXLEY

TO SET UP RESERVES that you know won't be used

Thu, 10/11/2012 - 18:02 | 2879013 New_Meat
New_Meat's picture

max, but do they really "know"?

I always wondered about crossing these current reports sometime in the future when actual taxes are paid.  Like, trend the past several years' taxes vs. their projections.

- Ned

Thu, 10/11/2012 - 17:00 | 2878868 JohnKing
JohnKing's picture

We don't really know how many little regulations were "eased" as a result of the 2008 crisis/meltdown/heist. For all we know CFOs may have a mandate to cook the books for national security reasons. I assume that many have some sweetheart waivers in place to do just that.

Everyone is broke but guzzling 6 dollar coffees at SBUX? REITS?

 

Thu, 10/11/2012 - 17:14 | 2878929 thomasincincy
thomasincincy's picture

Do banks trade stocks?

Thu, 10/11/2012 - 17:06 | 2878901 drivenZ
Thu, 10/11/2012 - 17:21 | 2878937 barroter
barroter's picture

...and one reason why no one trusts Wall St, the Banks and Business.

Thu, 10/11/2012 - 17:48 | 2878983 LooseLee
LooseLee's picture

Just another example of what this country has become. They all have bulls eyes on their backs, ya know...

Thu, 10/11/2012 - 18:42 | 2879064 The Alarmist
The Alarmist's picture

20% cheat on earnings.  Another 20% cheat on revenues.  40% cheat on valuation and restatements of intangibles. 30% cheat on the proper treatment of SPVs and JVs.  40% cheat on assumptions applied to pension valuations. 90% cheat on assumptions applied to value and expense executive compensation elements.  If you are below the C-Suite, 75% will fire your sorry ass for fudging an expense report.

Thu, 10/11/2012 - 18:44 | 2879068 blu
blu's picture

i loled

that wuz epic

Thu, 10/11/2012 - 19:41 | 2879168 Stuck on Zero
Stuck on Zero's picture

Now you know why CFOs and CEOs like sudden recessions.  They can cover all their years of lies by blaming a recession.

 

Thu, 10/11/2012 - 22:39 | 2879671 yellowsub
yellowsub's picture

That's why they hire independent paid for by the company auditors.  If htey can find it then that means they didn't do a good enough job of hiding and depending on how much they pay annually, they'll help you or not.

Fri, 10/12/2012 - 02:09 | 2880105 laomei
laomei's picture

But but, it's chinese companies that cheat, surely not good old honest and never thieving us companies!

 

20% admit manipulating statements for personal gains, the other 80% just raid the pension/insurance funds.

Fri, 10/12/2012 - 07:28 | 2880684 kralizec
kralizec's picture

Shocking.  Those who write the accounting rules would be horrified to learn people implementing them know more than they do.  Hit the snooze alarm, nothing to see here, move along...

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