GOOD EARNINGS AREN'T AS GOOD AS THEY SEEM

By JOHN CRUDELE
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October 23, 2001 -- COMPANIES are regularly falsifying their corporate earnings reports, and it is misleading investors.
That's the shocking - but not surprising - conclusion drawn by the Jerome Levy Institute, an economics research firm, that contends companies have regularly been overstating their profits by more than 10 percent for two decades.

It's no wonder there has been a stock market boom during this time. The lying has accelerated recently, with profits now being overstated by 20 percent, the report said.

If that's true, it would also mean that the stock market - which is still frighteningly overpriced - would be that much more dangerous.

In a report that was recently made public, the Levy Institute accuses companies of abusing non-recurring charges, or writeoffs, to distort their profits. As a result, it says that companies' operating profits - which exclude these non-recurring charges - have been regularly higher they should be.

And companies have coaxed Wall Street into looking at those operating profits, while ignoring the net results that include all the bad, one-time occurrences.

"Exaggerating operating earnings has made it appear that many firms were doing better than they actually were," says the report.

The Levy Institute says profits are further inflated because companies don't account for the widespread distribution of stock options to employees as expenses, even when they are given in place of wages.

Include that, the Institute says, and profits could be overstated by even more.

I've discussed some of this before. Just watch - at the end of this year many companies will announce employee layoffs, plant shutdowns and other"unusual" charges. Why? Because it gives these companies some aerial cover for poor earnings performances that could ground their stocks.

Why would companies do this? Because by clouding the earnings picture they give Wall Street a reason to forgive their poor performance. It's wink-and-nod stuff - Wall Street says give us a reason to excuse your mistakes, and companies concoct a reason.

If workers get hurt in the process, too bad.

There is a euphemism for this and all the other shenanigans that companies use to inflate their profits, or at least to come up with results that are in line with what Wall Street expects. It's called"managing earnings."

Manipulation is a better word for it. Wall Street applauds those companies that"manage" their earnings, but a simple word change would get even the investment community a little nervous.

"Just how widespread and serious is the overstatement of aggregate corporate profits?" asked the Levy report.

"The answer is startling. The macroeconomics evidence indicates that corporate operating earnings for the Standard & Poor's 500 index have been significantly exaggerated for nearly two decades - by about 10 percent or more early in this period and by over 20 percent in recent years."

Yesterday I spoke with David Levy about the manipulation.

"In its innocent form, it could involve [a company deciding] when to take a gain. On the other hand, it could be the rationale for distortions that are unethical and, in some cases, illegal," he added. And this nonsense is hurting investors, although most would not want to see the market's reaction right now to a sudden turn toward honesty. The price-to-earnings ratio of the S&P 500, for instance, is currently about 28-to-1. After the current quarter's dismal earnings are reported, that ratio will undoubtedly rise to over 30-to-1.

* Please send e-mail to:

jcrudele@nypost.com

Quelle: http://www.nypost.com/business/32316.htm

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