Report: Companies Using Flexible Accounting Rules to Beat Analysts’ Estimates

Companies are reportedly using flexibility in accounting rules to beat analysts’ estimates at a time when business is slowing.

This is being done often enough that one gauge of earnings manipulation is higher than it has been in 40 years, The Wall Street Journal (WSJ) reported Thursday (June 1).

Many of the strategies used are allowed under accounting rules but are criticized by some, according to the report.

In one example, companies have boosted their per-share earnings by reducing their depreciation expense for computer servers or other equipment.

Another strategy is to supplement official data with pro forma measures, which don’t follow accounting standards, according to the report.

A third common move is to shift the timing of employees’ stock compensation awards from one quarter to another, the report said.

Another example given in the WSJ report is unwinding charges made in one quarter to improve the earnings in a later quarter.

One recent study found that the Beneish M-score of a recent sample of companies was the highest it has been in 40 years. Another study found that the difference between the adjusted net income and the net income based on accounting standards for a recent sample of companies was 130% higher than that of a similar sample analyzed last year, according to the report.

Among a sample of companies that have reported their first quarter earnings, 77% beat analysts’ expectations — higher than the 66% of companies that have done so during an average quarter since 1994, the report said.

This report comes at a time when earnings calls across industries have shown a shift from growth to efficiency.

In a sample of first-quarter calls, the number of mentions of terms like “personnel costs” and “spending on hiring” are 80% lower than they were in the previous quarter, Bloomberg reported May 1.

In another reversal from the previous quarter, the number of references to “job cuts” has increased, according to the report.

The report attributed these changes to companies’ concerns about rate hikes, the threat of an economic slowdown and a response to investors who are rewarding profitability rather than growth.