CFOs may be a little cynical about their peers, as a
recent study shows that, on average, they believe that about one fifth of firms use discretion within GAAP to distort their earnings. The study authors performed a large scale survey of 375 CFOs, and supplemented the data with 12 in-depth interviews with CFOs from "prominent firms."
One of the questions in the survey was "From your impressions of companies in general, in any given year, what percentage of companies use discretion within GAAP to report earnings which misrepresent the economic performance of the business?" The mean response among all survey participants was 20 percent, though private company CFOS thought it was closer to 30 percent.
How much do CFOs believe earnings are distorted? Another of the questions in the survey asked "For this question, consider only companies that use discretion within GAAP to misrepresent economic performance. Among these firms, assume that earnings per share if $1 per share. Of this, how many cents per share is typically misrepresented?" The mean response was 10 cents.
CFOS in interviews said they believe it is unlikely analysts would spot occasional earnings management, with only persistent abusers being likely to get caught.