A warning to those following earnings season closely: Don't trust what you read.
About 20 percent of companies “manage” their books to mischaracterize their economic performance, according to a recent survey of chief financial officers conducted by economists at Duke and Emory Universities. Of those who cook their books, about 60 percent misrepresent their economic performance to increase their income.
Though the CFOs admit that it’s hard to “unravel” the book-cooking from the outside, they offer a few red flags to look for: deviations between earnings and cash flows, if the reports seem vastly different from those of industry peers and if there appear to be large and unexplained accruals.
“Earnings misrepresentation occurs most often in an attempt to influence stock price, because of outside and inside pressure to hit earnings benchmarks, and to avoid adverse compensation and career consequences for senior executives,” the report found.
Earnings season for the third quarter kicked off Monday and the motivation to cook the books might be high, since some analysts are expecting this quarter to be the worst since 2009, according to the Financial Times.
Executives might be wary though; data manipulation has become a hot button issue in recent days, after former GE CEO Jack Welch accused the Obama campaign of manipulating the September jobs report to make the unemployment rate look lower. Welch’s former employer settled a suit with the SEC in 2009 over charges the company manipulated its earnings reports. Welch was CEO of the company during a period of the alleged manipulation.
But corporate earnings aren’t the only thing you can’t trust. More than half of the interest rates used to determine everything from consumer to business loans are determined by bankers’ guesses or lies, a recent study found.
Also on HuffPost:
<a href="http://www.huffingtonpost.com/2012/10/05/jobs-report-conspiracy-theory-baseless_n_1942685.html">Jack Welch, former CEO of General Electric, tweeted</a> on Friday that President Obama's team must have cooked the September jobs numbers in order to help his reelection chances. But <a href="http://www.huffingtonpost.com/2012/10/05/jobs-report-conspiracy-theory-baseless_n_1942685.html">these claims are baseless</a>: The Bureau of Labor Statistics is an independent agency that conducts scientific random surveys.
Rush Limbaugh On Jobs Report
Long before <a href="https://twitter.com/jack_welch/status/254198154260525057">Jack Welch accused the Bureau of Labor Statistics</a> of cooking its books to help President Obama on Oct. 5, conservative talk show host <a href="http://www.rushlimbaugh.com/daily/2012/02/03/happy_days_are_here_again_in_obamaville_raw_jobs_numbers_tell_very_different_story">Rush Limbaugh claimed in February</a> that the Bureau of Labor Statistics' seasonal adjustment of the jobs numbers amounted to cooking the books to help President Obama. He said that "the raw number" from December to January meant "we lost two million jobs." But economists agree that seasonal adjustment is critical for month-to-month measurements, since there are seasonal factors that add noise to the data otherwise. (Hat tip: <a href="http://www.businessinsider.com/economic-conspiracy-theories-2012-8?op=1">Business Insider</a>.)
<a href="http://www.huffingtonpost.com/2012/09/13/donald-trump-federal-reserve_n_1882256.html">Real estate mogul Donald Trump told CNBC</a> in September that the Federal Reserve is "creating phony numbers and they're doing it through stimulus." The Fed has bought securities in its three rounds of quantitative easing, which many economists argued has had a <a href="http://www.huffingtonpost.com/2011/06/21/federal-reserves-bond-buy_n_881805.html"> real effect on the economy</a>.
Republican political strategist <a href="http://thinkprogress.org/media/2008/12/09/33404/rove-oreilly-economy/">Karl Rove and Fox News host Bill O'Reilly said</a> in December 2008 that journalists exaggerated the economic crisis then so that anything under President Obama would be an improvement. But the economy really was in a deep recession at the time.
Erin Burnett ON Fed Stimulus
<a href="http://outfront.blogs.cnn.com/2012/08/31/fed-chairman-ben-bernanke-defends-stimulus-that-cost-1-million-per-job/">CNN anchor Erin Burnett said</a> on her show "Erin Burnett OutFront" on Aug. 31 that Federal Reserve Chairman Ben Bernanke may embark on another round of quantitative easing, a type of monetary stimulus, in order to help Obama get reelected and keep his own job. But the Federal Open Market Committee (FOMC) is independent and makes its monetary policy decisions based on how the economy is doing. Also, Bernanke is a registered Republican and was appointed by George W. Bush.
Rush Limbaugh On Financial Crisis
Conservative talk show host <a href="http://thinkprogress.org/politics/2008/12/22/34058/limbaugh-democrats-indy/">Rush Limbaugh claimed in December 2008</a> that President Obama helped cause the financial crisis so that he could gain power. (Hat tip: <a href="http://www.businessinsider.com/economic-conspiracy-theories-2012-8?op=1">Business Insider</a>.)
Rep. Ron Paul (R-Tex.), who believes America should abolish the Federal Reserve and go back to the gold standard, <a href="http://www.fool.com/investing/general/2011/04/14/the-conspiracy-theorists-history-of-gold.aspx">said in 2010</a> that the New York Fed might not have any gold in its vaults, according to The Motley Fool. Actually, <a href="http://www.newyorkfed.org/education/addpub/goldvault.pdf">it does</a>.
Erin Burnett On Food And Gas Prices
<a href="http://www.huffingtonpost.com/2012/09/08/erin-burnett-federal-reserve_n_1866971.html">CNN anchor Erin Burnett claimed</a> on her show "Erin Burnett OutFront" in September that the Federal Reserve's stimulus measures have caused food and gas prices to rise. But <a href="http://www.huffingtonpost.com/2012/09/08/erin-burnett-federal-reserve_n_1866971.html">there has been no correlation</a> between the two.