There is always a high degree of anticipation as well as optimism among investors when companies start announcing their quarterly results. The anticipation that comes with such announcements is in one way or another hinged on financial analysis as well projections by financial experts and market analysts. When faced with such projections and optimism, most CFOs tend to be under pressure to deliver results that do reflect such prediction. More pressure is piled up by Wall Street that is always harsh to judge when it comes to missing the earnings estimates.
In order to meet or beat such estimates, it is unfortunate that some companies resort to a peculiar process of manipulating their corporate earnings. Even though it is not strange for a company to report quarterly earnings that are way below the consensus estimates, most CFOs, due to the high degree of optimism associated with that particular stock price, tend to find themselves in situation that has less room for error otherwise the company’s stock will start under-performing.
There is a reason as to why a company may decide to manipulate its earnings. In fact, it may seem a little bit questionable but the reality is that there are surprisingly few legal accounting “tweaks” that can be made to corporate earnings late in a quarter in order to achieve the desired results. Although, such manipulations might be legal, they might come back to haunt the company either in the long run or short run.
Fortunately, there are a number of ways to avoid to fall victim to earnings manipulations. One way in which you can detect any manipulation is through looking into sales growth. It is not possible for a company to grow consistently without any growth in earnings.
In conclusion, to companies, corporate earnings manipulation seems like a necessary vice meant to sustain the company’s stock value. However, it should be noted that they also carry consequences in the long and short runs.