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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.
(more)
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