Corporate Earnings Manipulated One-Fifth Of The Time, CFOs Say

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.