Tuesday, February 28, 2006

Be Wary 

Be wary when a company always meets estimates. There is usually something like this going on in the background. Even the largest corporations used earnings smoothing over the decades. Investors like the certainty of earnings that march ever upward, and estimates that never miss. But real life is rarely like that. Companies have swings of good fortune and bad. CFOs have always known that, which is why they used "cookie jar" reserves to pull a few million here and a few million there to make earnings come out right. Today, of course, this is illegal, but you can be sure some CEOs and CFOs are still doing it in subtle ways.

From a PR perspective, it can only end in disaster if and when it is discovered. CEOs obsessed with making earnings and CFOs willing to comply are a danger. Boards know that, but the question is whether they can stop them. Reputations of individuals and of companies hang in the balance.


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