Pinocchio CEO’s

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A few weeks ago, I spoke how interim CEOs often cook the books– so they can be permanently appointed.  That happens to be a marginally (or fully) criminal endeavor.  But, many, many other CEOs obfuscate results so that their stock price stays high- and that often sets their (ridiculously high) compensation levels.

I know you think this is just my rant.  But, as I shared with you when I discussed the interim CEO’s, you will see this sort of (reprehensible) behavior is becoming the norm.   GAAP (generally accepted accounting practices) may be what these firms follow- but not how they report their results to the public.

Consider a slew of terms.  EBITDA.   Adjusted Sales.  Adjusted Net Income.

Why are we adjusting sales?   Why are we adjusting net income?  And, why not just report profit and loss, instead of resorting to the fanciful Earnings Before Interest, Taxes, Depreciation, and Amortization?

Why?  Because the real numbers- the profits, the sales, the net income values- suck. Consider this.  Q3 2015 numbers for our public companies have been reported.  (When this post was being written, Q4 was still ongoing.  Moreover, Q4 2015 numbers won’t be reported for weeks yet.)   And, Earnings Per Share (EPS) for the public firms dropped 13%.  Oh, wait- no, they didn’t.  Because the firms tried to convince you that EPS was virtually stable, only falling 0.1%.  Except those numbers were not EPS but EBITDAPS.   And, that acronym clearly spells Bull…..

Which firms are providing this sort of malarkey?  You know, the small firms- firms like Dow Chemical, AT&T, Wendy’s, Post (cereals) Holdings, United Technologies among a slew of others.  T Mobile uses this bogus measure, too- but they seem to be the only firm that was notified by the SEC of their obligation to report real numbers, the ones acceptable under GAAP.

There are other more arcane shenanigans.  For example, Scana (a utility company) decided to smooth out its data by taking into effect climate- when it’s warmer or colder than they expect.  [I can see a whole bunch of ski resorts coming up with processes to report profits, since this fall and winter have reached record high temperatures for the most part- rendering it impossible to make fake snow, let alone having any real snow on the ground.]

Square decided to strip out their revenue associated with Starbucks sales (14.5% of their totals), so that next year’s numbers will look good- since Starbucks no longer uses their product.   (Hmm.  Will American Express be removing revenue associated with Costco and Fidelity, since they’ve been dumped?)  Since AT&T and Sprint are finally upgrading their networks (you know- to those high speed systems they’ve been claiming they’ve been offering for years), so they decided to omit their mega-billion depreciation amounts from their earnings reports to provide rosier pictures.

And, let us not forget Valeant.   You know- the pharmaceutical firm that buys existing drug companies, terminates their R&D, and raises the prices on the drugs they sell.  Their creative financial reporting processes have been one of the ways they’ve manipulated their stock- the price increased 10 fold over the past few years.   By fooling the investor community, claiming they are “transparent”.  Sure they are- they are transparently lying to the public.  (Why is the SEC not socking them with fines?  Oh, because the majority party in the House and Senate don’t think this is a bad practice.)

Some of Valeant’s creative measures… “cash earnings per share”.  What does that mean?   Whatever they want, since it is not an approved term for use.  Valeant’s GAAP earnings for Q1 through Q3 2015 came to $ 70 KK.  But, with their ethereal “cash earnings per share”, one would think they garnered some $ 2.7 billion in profits.   WTF?   They inflated their earnings by a factor of 39.  Want to know why?  (Come on, you know the answer….)  Because Michael Pearson (CEO) and his cabal are paid based upon this bogus measurement- one they can adjust at will, since (again) it has no standard definition.  Meanwhile, no government body utters a peep, nor are criminal charges leveled against the executives of the firm.

Welcome to the Brave New World.  The one where the next Great Recession (due to financial shenanigans by “Too Big To Fail” firms) may be just around the corner.

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8 thoughts on “Pinocchio CEO’s”

  1. There’s nothing like a good rant to unburden yourself! Kept me reading right until the end. Creative accounting and statistics may create a rosy outlook in the short term, but someone will pay sooner or later. Many an unfortune ‘mom and pop’ investor have lost their savings to unscupulous company investments.

    1. Sorry for the delay, Lee-Ann. This got sent to spam for some reason.
      Unfortunately, these CEOs are not the ones paying. The small investor, the employees, the communities in which these firms operate- they are the ones who take it on the chin all too frequently.

  2. I do wonder how we expect anyone to understand financial terminology anymore. I just started only using EFT funds because they consistently beat the market. But I’m 44, have an MBA and have listened to all the crap marketing about how mutual funds have x returns and yada yada yada

    1. Martha:
      First, thanks for the visit and comment.
      And, the key point is that these are NOT financial terminology, in that no one has defined them as such. (except for the firms trying to inflate their worth, to convert a poor story to a better one…)
      Don’t you just love it when all these firms claim to “beat the market”? How is it that more than 50% can beat the market? Doesn’t “beat the market” mean you have to be in top ranks? If more than 1/2 are….

  3. Ahhh the beautiful world of cut throat business and worrying only about making oneself look good. As I was reading your post I kept thinking about a Ted Talks video I watched a few months ago “Margaret Heffernam: Why It’s Time To Forget Pecking Order At Work” (http://www.ted.com/talks/margaret_heffernan_why_it_s_time_to_forget_the_pecking_order_at_work). Unfortunately, it is the super chicken mentality that will lead to the next “Great Recession”.

    Praying Your Success,
    Kim

  4. Makes my head spin. Corruption and “creative criminality” I understand. Math? Not so much. Accounting? Let’s just say I’d have gotten into computers a decade before I did, if I hadn’t so strongly associated them with…accounting. No, I’m not stupid. But I’m into words, not numbers. 🙂 The way some people can’t be bothered to properly place a comma, I can’t be bothered to remember to carry or borrow, sometimes. 😀 The term “forensic accounting” does make it seem moderately interesting, though. So many things they don’t tell you about when you’re young, that tend to color your thinking throughout life.
    Holly Jahangiri recently posted..Well Played, Facebook!

    1. And, Holly, that’s just what these (corrupt) CEO and CFO types are banking on. You will just hear that they made a profit (because they didn’t count all those little things that made their profits negative), and buy their stock.
      For example, Macy’s was saying all year long how well their company was doing. Ooops. Gotta close a bunch or stores and fire a slew of folks. Hmm. That’s what happens when you measure sales and profits using “existing store sales”, “new store sales”, “weather adjusted sales”, etc.

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