Procerity

We are in the middle of the third quarter earnings season and losses are exceeding expectations. The Dow Jones is once again nearing its mortgage-meltdown low on disappointing earnings announcements. Perhaps, just perhaps, there is a bit of time-shifting happening with the reported numbers. Not necessarily illegal, but manipulative just the same.

Suppose you are the CEO and your firm is going to report a terrible third quarter, and you know your stock is going to take a beating as a result. Well why not move some of the bad news expected for the fourth quarter into the third. I mean, investors are expecting to be disappointed anyway. And look at the upside. The fourth quarter will not be as disappointing, exceeding analysts’ expectations (on the positive side), and your stock will recover. Aren’t we lucky that accounting involves so much estimation?

Procerity’s Prognosis: Cash flow from operations is more meaningful and less subject to manipulation than net income.