Published June 27, 2002
Which companies would be doing a lot worse without creative accounting?
An outright fraud like WorldCom (WCOM)'s is hard to spot. But not so hard is finding companies that, without the help of some bookkeeping creativity, would stink up Wall Street.
I asked Standard & Poor's to put together a list of the five firms whose core earnings - the profit before certain gimmicks - would be a lot worse than the numbers they reported.
This is legal stuff. But in this era of earnings purification, these five firms wouldn't cut it.
"We would not have been any better at catching WorldCom than anyone else," says David Blitzer, S&P managing partner. "If the numbers are wrong it doesn't matter how you add them up."
But Blitzer says there are other, more-subtle ways to boost profits - like not counting stock options as a corporate expense like salaries.
So S&P recently started stripping from earnings such nonsense as gains in pension funds assets (which belong to retirees and not the company), the cost of restructurings (which some companies use to obscure real profits and losses), and the cost of stock options (which are used to reduce salary costs).
Typically, S&P says the average overstatement is 10 percent to 15 percent because of these tricks. But this way of calculating profits is so new that it's still hard to tell.
So which five significant companies overstate profits the most, according to S&P's calculations?
The research firms says Raytheon (RTN) may be reporting profits that are nearly 9,000 percent better than its "core" real numbers. And Perkin-Elmer (PKI) is 7,274 percent overstated; The Gap (GPS), 1,047 percent; Apple Computer (AAPL), 1,003 percent; and Yahoo! (YHOO) 956 percent.
Options are the only thing that inflate the earnings of Gap, Apple and Yahoo! Raytheon and Perkin-Elmer are helped by several factors.
Tuesday was the last day on which most hedge funds, bankers and brokers could execute a trade and still have it count toward their second quarter performance. Mutual funds and money managers have until Friday.
Under normal circumstances, the pros would try to keep the market up this week especially since the rest of the quarter has been so dismal. And last week also should have been a strong period because of stock options and futures expirations.
So, given these calendar quirks, it's important to point out that this week's performance on Wall Street really smells.
What does the continued bad action for the market tell us?
That stocks are in trouble now that even the big shot market manipulators can't ignore such fundamentals as disappointing corporate profits, fraudulent accounting and the complete disinterest of small investors in the market.