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Study: CFOs Don't Entirely Trust Each Other on the Numbers

By:
Chris Gaetano
Published Date:
Feb 16, 2016

fingers-crossedA recent survey of about 400 public and private company CFOs has found that when they look at another business's earnings report, they believe there's a decent chance those numbers have been manipulated. Specifically, poll respondents were asked what percent of companies, in any given year, are misrepresenting their economic performance. The average overall answer was about 20 percent, though when looking at private company CFOs only that guess jumps to 30 percent. When asked to estimate the scale of these manipulations, CFOs believed that misrepresentations accounted for 10 cents out of every dollar of reported earnings figures from these companies.  

The CFA Institute, which conducted the poll, specifically ruled out accounting fraud in order to focus on earnings management that, while still technically within the rules of Generally Accepted Accounting Principles (GAAP), none the less does not give an accurate picture of the company's true financial health.  

When asked in followup interviews why they thought earnings management was so high, CFOs said that analysts generally aren't very good at detecting it, with only the most egregious offenders getting caught. This is because most earnings management, CFOs believe, is largely invisible.  

"To summarize, the picture that emerges is that earnings misrepresentation is fairly common and has a material effect on earnings. Identifying it from the outside is difficult because GAAP provide considerable latitude with unobservable accounting choices, with the resulting effects buried in aggregated items on the financial statement," said the report.