The article “Confused About Earnings” from the November 26, 2001 issue of Business Week, discusses the discrepancy between corporate earnings as reported according to GAAP rules vs. other earnings numbers published by companies according to their own methods of accounting. As you would expect, companies use their own methods for calculating earnings in order to portray a better financial picture than what would have otherwise been displayed by the GAAP earnings. I do not fault the companies for choosing numbers that paint them in a better light as long as the methods are fully disclosed and the GAAP numbers are also available to the public. I believe that fault can be found with the investors and the analysts on which they rely who are pressuring the companies to “perform” better and better so that they can “sell” them to investors, even if they are a bad investment choice.
I do agree that more oversight in terms of how earnings are reported would greatly benefit investors that are truly looking to objectively evaluate a company and a standard for reporting this information should be the goal of any new legislation on the issue of financial reporting.
Until such a standard can be successfully developed and adopted by corporations, Investors should stop contributing to the problem by refusing to invest in a company that can not clearly explain how their earnings figure into the standardized GAAP reporting and exactly how and why they were calculated if they differ from the GAAP standard.
People, however, will continue to invest in companies that portray higher and higher earnings regardless of whether the earnings can be substantiated. They will only cry foul once the company goes under, and they will certainly not blame themselves for not properly investigating the company before investing.
Although, I do not agree with you, I understand where you might be getting your opinion from. But, isn’t blaming the pushy investor for a manager’s misleading financial statements tantamount to blaming pressure cooker environments for students who choose to cheat?
In your last paragraph, I think you might be alluding to Madoff’s Ponzi Scheme. When Madoff brought in impossible returns even during down years, investors rejoiced in the phony earnings and never questioned his portfolio.
I find it reprehensible that a company such as Dell would cherry pick when to use gains from venture capital to add to the bottom line, and ignore it during down years.