Investors Be AFRAID, Be VERY AFRAID of Corporate Accounting!

Wall St. Cheat Sheet has spent a lot of focus on bringing investors like you professional level coverage of earnings season. We brought in a team dedicated to delivering you Cheat Sheets of earnings for companies in the S&P 500 (NYSE:SPY), Dow Jones (NYSE:DIA), and Nasdaq (NASDAQ:QQQ). And here’s the major takeaway for the retail investor:

Be scared! Be very scared of corporate America’s accounting practices and the Wall Street analysts who support them.

The first and most important thing to meditate on is companies provide journalists and retail investors with financial data NOT GENERALLY ACCEPTED by accountants. Take some serious quiet time to consider how f*ed up that is.

Adding insult to injury, Wall Street bows to company wishes (so they can drum up investment banking business) and provides earnings estimates according to NON-GAAP financial data. That means when journalists like us tell you a company beat or missed earnings expectations, journalists are talking about the most convoluted and manipulated data.

“Wait!” say the companies. “We have lots of one-time events which are anomalies. Thus, we need to break those out and not count those toward how investors judge our business performance.”

Really? Did the event happen? Did it happen to your company? Then it’s REAL. Second, the ugly secret about “one-time charges” is companies have them every quarter. So, they are NOT REALLY “one-time charges”. Rather, they are an entire class of business activity which occur regularly and should be judged that way. That’s why — drum roll, please — GAAP accounting does not allow companies to make these subjective and misleading categorizations.

Another area for manipulation is determining the official earnings estimates. Which set of analysts establishes the “miss or beat” line of demarcation? There’s Briefing, FactSet, mean analyst estimates, estimates boiled down by publications such as the Wall Street Journal, etc. So, there is NO holy grail estimate to meet or beat. And during earnings season if Wall St. Cheat Sheet used a number companies didn’t like, they let us know despite us citing a valid data source.

So, I have a wild and crazy proposal for companies which allegedly give two shits about transparent accounting for investors: focus on GAAP numbers upfront, then let us know about one-time charges and WHY we should consider them as such. Let investors decide whether certain charges are worth ignoring; but, don’t muddle the situation with noisy headlines misleading investors into thinking your company truly outperformed.

Once press releases are built around a more truthful accounting of business activity, CFOs should call all the analysts covering their businesses (they have them on speed dial, no doubt) and demand Wall Street provide shareholders with earnings estimates in GAAP earnings. Why GAAP? LegalZoom says it best:

“Without GAAP, companies would be free to decide for themselves what financial information to report and how to report it, making things quite difficult for investors and creditors who have a stake in that company. Because financial statements prepared under GAAP are intended to reflect an economic reality, GAAP makes a company’s financials comparable and understandable so that investors, creditors and others can make rational investment, credit and other financial decisions. In order to be useful and helpful to users, GAAP requires information on financial statements to be relevant, reliable, comparable and consistent.”

I am a former investment banker who has built a site on providing truth, trust and transparency to investors. Investor relations is generally full of marketing professionals whose job is to present the best possible angle for the company. CFOs, savvy investors, and I know this. However, the retail investor is out working everyday and doesn’t have the same time to weed through all the trickery. Wall St. Cheat Sheet doesn’t support a public investment market where “companies would be free to decide for themselves what financial information to report and how to report it”. We hope you’ll stop supporting this legal con artistry too.

Now, let’s get back to analyzing the freshest earnings reports >>

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