The Dirty Little Truth About Corporate Lies

Even as the tulip–I mean Internet stock–market soars ever higher, the few people on Wall Street who still believe that there should be a connection between a company’s market capitalization and the amount of money it actually makes are now turning their eyes to the second-quarter earnings season. Motorola will announce its earnings tomorrow, and over the next three weeks we will be greeted with a deluge of announcements that will provide some sense of whether the recent run-ups in the Dow, the S&P, and the Nasdaq had any connection to earnings reality. (That seems unlikely, when you consider that Wall Street analysts, who are almost always over-optimistic, are forecasting earnings growth of just 2.3 percent.)

Much has been written in recent weeks–particularly in the wake of the Sunbeam and Cendant accounting fiascos–about the way corporations use large one-time write-offs to disguise operating expenses and boost earnings, and about the sketchy way in which acquisition-minded companies use write-offs to ensure that their earnings keep rising. But an astonishing admission about the desperate quest to make earnings look better than they are is hidden in the most recent BusinessWeek, which features a two-page “special advertising section” describing a recent retreat the magazine held for almost a hundred corporate chief financial officers (CFOs).

At the retreat, a survey was apparently taken asking CFOs how they responded when “senior company executives ask [them] to misrepresent corporate results.” Twelve percent of the CFOs admitted that they had “misrepresented corporate financial results,” which in itself is troubling, since if one out of every eight CFOs admitted fiddling with the numbers, it’s not hard to believe that many more actually have. What’s truly amazing, though, is that another 55 percent said that they had been asked to misrepresent results, but had “fought off” the demand.

In other words, two out of every three of these CFOs–and the companies present included Microsoft and Gateway, among others–have been asked by their bosses to lie to shareholders about their company’s financial performance. In one respect, this isn’t surprising, when you think about the degree to which executive compensation is now tied to a company’s stock price, which in turn should depend on earnings. But there is still something shocking about the picture of a system in which CFOs are being pressured to deceive the people who own the company, and in which many of them are succumbing to that pressure. In the wake of the Asian crisis, the United States has kept patting itself on the back about the transparency of its system. But the Business Week item is an excellent reminder of how cloudy much of corporate finance remains.