Cooking the Books – How S&P 500 Companies Are Reporting Fictitious Earnings

by Jason I. Henderson, Ph.D.

As the name implies, there are 500 companies that comprise the S&P 500.   Of those 500 companies, as reported by the Wall Street Journal,  a paltry 29 closed their books for 2015 exclusively using the U.S. Generally Accepted Accounting Principles, or GAAP.  In 2014 there were 125 companies who used GAAP exclusively.

WHAT IS GOING ON?  I will tell you, companies are struggling to increase their earnings, but simply cannot do it using GAAP.  Stepping outside of those accounting principles the accountants, who should know better, can adjust, or customize figures so that the company’s profit can be inflated by as much as 44%.  Additionally, unprofitable companies can get a bigger boost than profitable ones according to new research by financial-data provider Calcbench Inc.  Quoting Calbench: “non-GAAP metrics are not prohibited by federal securities law. A company must simply demonstrate that the non-GAAP metric it wants to use does indeed convey useful information to investors.”

Useful information?  How deep do you have to dig in order to know if a number is a fabrication or not? Do you think investors can get a true representation of the risks they are taking when they buy those stocks or the indexes themselves?

Isn’t it true that if everything meets GAAP requirements there is no need to include non-GAAP information? Are many of these companies in worse financial condition than is being reported?

Wait until you read the billions and billions of dollars of adjustments that are made to earnings using non-GAAP accounting.

Why isn’t the SEC and FINRA and all those regulators focused on the hundreds of billions in losses that shareholder will endure because of these misrepresentations or at least intentional obfuscation of the truth? Where is the Department of Labor?

The old adage applies, buyer beware.

I like the certainty and control I have while implementing the Infinite Banking Concept, or IBC.  No need to dig through a bunch of accounting acrobatics to understand where I am and what I can and should not do.