Overstated Earnings are Widespread
More US Corporations Inflating Their Profits by Billions?
It's not just Enron and WorldCom. All corporations need to disclose the truth to their shareholders. Often they do not. Such dishonesty gives rise to more calls for government regulation of business.
Widespread corporate dishonesty makes a "free market" seem like a bad idea.
Here are portions of a news report that The Progress Report has received from an anonymous source.
Some of America's best-known and most respected companies are overstating their earnings by billions of dollars, according to credit rating giant Standard and Poor's.
A report just released by the agency accuses the likes of Dupont, IBM, General Electric, Microsoft and Cisco of consistently inflating their profits.
The study is potential dynamite in the wake of the recent accounting scandals. Last week WorldCom admitted to overstating its profits by $3,800,000,000, Xerox adjusted its figures by more than $6,000,000,000 and General Motors was forced to deny that it had accounting problems after rumours forced a suspension of its shares.
On July 1 WorldCom's directors will be forced to swear to the accuracy of their figures and analysts expect it to file for Chapter 11 bankruptcy within days.
The S&P study compares the declared profits of many of the largest companies in the US to what it calls "core earnings". It finds that corporations have been boosting their numbers by including income from their pension funds, adding back charges made when buying companies and not allowing for the cost of share option plans.
When these changes are taken into account, some of the big profits declared by US giants virtually disappear.
For example, the $4.33bn of earnings declared by chemical group Dupont in 2001 fall to a loss of $49m under S&P's calculation - a difference of $4.38bn. IBM's 2001 profits are down $2.87bn, Microsoft's $2.26bn lower, and the $1.01bn loss made by internet giant Cisco soars to $2.52bn.
General Electric, the largest corporation in the world, is found to be a consistent offender. In 2001 it overstated its earnings by $2.23 bn, in 2000 by $1.93bn, in 1999 by $1.43bn, and in 1998 by $1.01bn.
Among smaller but well-known names, the inflation of profits is also prevalent. The Gap, Apple and Yahoo! are all cited as companies where "core earnings" are a fraction of those reported to the markets.
"A number of high-profile recent bankruptcies have renewed investors' concerns about the reliability of corporate reporting," says David M Blitzer, S&Ps chief investment strategist.
S&P, and its rivals Moody's and Fitch, are seen as independent arbiters of corporate earnings. Investors are increasingly turning to them for impartial advice because of concerns about the independence of investment banking research in the wake of the prosecution of Merrill Lynch by the New York district attorney, and of auditors following the Enron and Andersen scandal.
The US financial regulator, the Securities and Exchange Commission, has come under fire for allowing the Enron and WorldCom scandals to blow up. Harvey Pitt, its chairman, has been criticised for being too close to Wall Street.
What is a sound, just solution to this mess? Has "corporate America" ruined itself? What's your opinion? Tell your views to The Progress Report:
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