More on corporate book cooking

["Charles Brown" <CharlesB@xxxxxxxxxxxxxxxxxxxxx>]

NY Times, September 2, 2001

MARKET WATCH

Take Away the Window Dressing, and Who Will Buy?
By GRETCHEN MORGENSON

With the global economy in a stall, corporate spending at a
standstill and layoffs threatening to subvert consumer spending, it
is no surprise that the United States stock market is feeling
overwhelmed.

But something else is weighing on stocks. That is the creeping
realization among investors that the momentous earnings reported by
many companies in recent years may have been digitally remastered to
include a lot of hype, embroidery and fluff.

This is significant. Investors coming around to this view will be
less inclined to trust forecasts that company executives make. Having
lost faith in a company's numbers, investors will be unable to place
a fair value on its stock. In the dark on valuations, many investors
will shun the shares.

An extreme reaction? Not at all. It is precisely the payback that
companies deserve for embellishing their earnings.

The quality of corporate earnings seemed a quaint concern when stocks
were racing. Now, reality in company earnings is crucial. But
separating reality from fantasy in corporate earnings is harder than
ever. Consider the gulf between estimates of second- quarter earnings
from First Call and Standard & Poor's. While First Call said
operating earnings among companies in the S.& P. 500 had fallen by 17
percent from the same period last year, S. & P. reckoned that the
decline at those companies was 33 percent in the quarter.