Often when companies are experiencing troubling financial times, you’ll see more adjustments to earnings. According to Ben Foldy in The Wall Street Journal, the use of that financial tool is increasing. He writes:
Business slowed last year for Google’s parent, Alphabet GOOG -1.02%decrease; red down pointing triangle. The tech giant still beat earnings expectations in this year’s first quarter, in part because it said that its computer servers would last longer than expected.
The shift reduced its depreciation expense by nearly $1 billion and helped push per-share earnings ahead of analysts’ estimates.
Google isn’t alone in boosting its earnings in surprising ways. When business slows, companies often try to make their numbers look better. That appears to be happening now, from tech giants to used-car dealers.
A spokeswoman for Google declined to comment.
More companies are beating analysts’ expectations and by bigger amounts. Businesses’ nontraditional earnings metrics are beating reported earnings by a lot more than last year, and a measure of the likelihood of earnings manipulation is at its highest level in about 40 years.
Companies have long engaged in earnings management, by which executives use the flexibility in accounting rules to improve reported earnings per share.
The moves, many of which are allowed under accounting rules, nonetheless have detractors. In a letter to investors earlier this year, Warren Buffett called the practice “one of the shames of capitalism.”One way companies are trying to make their results look better is to provide numbers that don’t adhere to accounting standards—what are often referred to as pro forma measures—alongside the official data.
A report published Thursday by research firm Calcbench compared the net income based on accounting standards for 200 randomly selected companies in the S&P 500 with their adjusted net income, which can include or exclude items that would normally be counted. The adjusted numbers were higher by $1.1 billion on average last year, an increase of more than 130% over a similar sample from the year prior.
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