OK I Get it, Corporate Earnings are a Fairy Tale and Reality is Crummy, But Do They Have to Push it This Far?

Even the SEC woke up. But what will the media do?

All 30 companies in the Dow Jones Industrial Average have now reported earnings for the first quarter. As required, all of them reported these earnings under GAAP, the thicket of Generally Accepted Accounting Principles that is supposed to help investors get some insights into the financial condition of the company.

But 19 of these 30 companies also reported “adjusted” earnings that they skillfully draped over their GAAP earnings, and now it all looks just so much prettier.

GAAP gives companies a lot of leeway to beautify their results. But in these challenging days of ours, it’s still too hard to make earnings look good enough. So companies, in collaboration with Wall Street analysts and the media, use their own principles that they make up as needed. And they’re certainly needed.

In Q1, according to FactSet, the companies in the DJIA that “adjusted” their earnings inflated them on average by 28.9% over their earnings under GAAP.

And the inflation in “adjusted” earnings is picking up. Last year, only 16 of the 30 companies in the DJIA resorted to this beautification strategy. And they inflated earnings by only 19.7% on average.

By “adjusting” earnings, the companies purposefully inflate growth of earnings and of earnings per share – crucial metrics that Wall Street bandies about in an attempt to justify sky-high stock prices.

In Q1, these 19 companies in the DJIA that “adjusted” their earnings showed an earnings growth of 5.7% on average, up from 4.3% under GAAP. And another tidbit: adjusted median EPS growth (half are over, half under) was 3.9%. But under GAAP, median EPS growth was just 0.7%.

Here are the five companies in the DJIA that inflated their earnings the most:

  1. GE by 200%, from $0.02 a share under GAAP to a whopping $0.06 a share under its own principles.
  2. Merck & Co. by 122%, from $0.40 a share to $0.89 a share.
  3. Caterpillar (it really needs a boost as its revenues have been getting hammered for years) by 46%, from $0.46 a share to $0.67 a share.
  4. Pfizer by 37%, from $0.49 a share to $0.67 a share.
  5. Coca-Cola Company by 32%, from $0.34 a share to $0.45 a share.

These are large companies. They tend not to go entirely crazy, unlike outfits with relatively recent IPOs that have never made any money and need every trick and device to keep their stock prices up.

Twitter for example. It lost money every quarter. In Q1, it lost $80 million under GAAP. But once Twitter got through adjusting that loss, it was a non-GAAP profit of $103 million.

That $183-million swing, obtained by adjusting the numbers, is proportionately huge, given that revenues were only $595 million. The adjustment had taken EPS from a loss of -$0.12 a share to a profit of $0.15 a share. A miracle!

Tesla is one of the few companies that managed to inflate even its revenues – and by a big chunk! Its Q1 “non-GAAP” revenues were $1.6 billion, up “over 45%” year-over-year, as it said in its press release. But its GAAP revenues were only $1.15 billion, and revenue growth was half of what Tesla pretended with its “adjusted” numbers.

In other words, Tesla inflated its revenues by 39%! That takes some doing!

Tesla’s net loss jumped by 83% to $282.3 million, or $2.13 a share. Shareholders are immune to these losses as Tesla has lost money during its entire decade of existence. Then it “adjusted” this loss down to $75 million, or -$0.57 a share, cutting its loss by 65%!

All this data is publicly available. Anyone reading beyond the hype is going to see it. The media even reports some GAAP numbers, usually hidden in the middle of the sixth paragraph or so, after they thoroughly beat you up with “adjusted” data and “analysts’ expectations.”

But no one wants to see it. Instead, everyone wants to believe the sweet fairy tale spun by Wall Street and Corporate America. We’ve come to call this phenomenon, “Consensual Hallucination.”

Even the SEC is getting worried. For months, they’ve been admonishing Corporate America and Wall Street about the prominence of these “adjusted” numbers in earnings presentations and in press releases. Then the  media take it from there, putting these “adjusted” numbers into the headline, which is all many people read. FactSet and others that aggregate and mine Wall Street data use these “adjusted” numbers in their reports and charts. These “adjusted” numbers are everywhere, drowning out any sense of reality.

In March, SEC Chair Mary Jo White came out to Silicon Valley, where non-GAAP has become an innovative art, and said that the SEC may consider new regulations to “rein in” how these non-GAAP numbers are used. Numerous other SEC folks have since made the rounds.

On Wednesday, Mark Kronforst, chief accountant of the SEC’s corporation-finance division, told an advisory group to the Public Company Accounting Oversight Board that there would be “an uptick” in comment letters the SEC sends to companies about the use of non-GAAP numbers. “We are sending a message and we are going to continue talking about it,” he said.

This comes on top of the new guidance the SEC issued this week, attempting to clarify when a company gives too much prominence to non-GAAP metrics. The SEC long has had some requirements, but they’re “not working,” Kronforst said. “I think this next quarter will be a great opportunity for companies to self-correct.”

Even if companies perform the miracle and “self-correct,” we doubt that the media and Wall Street analysts will “self-correct.” They’re the main perpetrators in the propagation of these fairy tales. If they’d wanted to, they could have stopped long ago featuring these fairy tales in their headlines and reports, but no way, that might have tripped up stock prices.

So how does this reality look for Corporate America. The Federal Reserve released its delinquency data for all commercial banks in the first quarter – very sobering data. Read…  Business Loan Delinquencies Spike to Lehman Moment Level

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  63 comments for “OK I Get it, Corporate Earnings are a Fairy Tale and Reality is Crummy, But Do They Have to Push it This Far?

  1. Agnes says:

    When I was involved in manufacturing, there were 326 steps and If I messed up (lied to myself) about a single step, I made scrap. Financially oriented profit entities must prosper by lying to themselves and others. And we call stackers and preppers gloomy and doomy. Perhaps because they believe in their families at least. And they are spending their own and not other people’s money.

  2. Just for laughs, how does the GAAP/non-GAPP numbers compare with the declared income for tax purposes from their 10K reports? For example did GE again show no net taxable income?

    • Wolf Richter says:

      Thank you for bringing it up!! That’s the biggest joke out there: the step down from “adjusted” income to GAAP income to taxable income.

      • OscarGold says:

        Hola Richter, conoces esta noticia ???


        Me suena que es lo mismo de Goldman ????

        • Wolf Richter says:

          Si conosco.

          >>>Hello Richter, do you know this news ???
          >>>It sounds to me like it’s the same with Goldman ????

          The linked article talks about Deutsche Bank’s offer in Europe of a 5% short-term CD – obviously to attract some money and new retail customers, and it speculates on the larger ramifications of such a desperate move.

      • d says:


        When will they make a law that state’s what you declare to the IRS is it or you are engaging in FRAUD.

        • Chip Javert says:


          BS. Plainly you do not understand difference between the federal IRS regulations (RAG – regulatory accounting guidelines) and the federal rules called GAAP (generally accepted accounting practices). Two different sets of mandated federal calculations and two different “profits”. Technically, if you get either of them wrong, you can go to jail.

          There never was, there is not now, and there never will be a single “right” profit number. If you are an investor and do not understand this, you are a fool. BTW, if, as an investor, you accept all the non-GAAP profit numbers thrown out by companies, you are a fool.

          Turns out,it’s difficult to be a profitable investor and be a fool. You REALLY have to understand the industry and company you invest in. Not as easy as it sounds.

          Thus, 80% of all private investors should invest in index funds. If you cannot read and understand the financial statement if the company you have invested in, you are an idiot.


      • nick kelly says:

        It reminds you of a mob casino- you have three sets of books- one for the IRS, one for your investors/partners and one closely guarded set for yourself.
        To continue the analogy, you have the ‘skim’ which in the case of the company, could include stock options given before the buy back of stock.

        • nick kelly says:

          Oh, one flaw in the analogy- the mob casino had (has?) to hide its multiple sets of numbers

        • commtrd says:

          The only fair taxation besides none at all (much preferable) is a consumption tax. Everyone consumes so there would be no getting around it by those who can afford to buy legislators to write them tax bypasses in the tax code. The current system is designed for social engineering i.e. penalize producers to reward slackers. SO the more you make, the more they take. Unless in the upper strata and can structure income apart from typical wages.

          No AI or any other “machines” needed. A more ridiculous idea than even the morbid mess in place now.

    • nick kelly says:

      How about a law that says the two must be equal. You either have X income or you don’t.

      • Chip Javert says:


        Since these are two different federal sets of regulations with different mandatory calculations (eg.: depreciation of capital assets) imposed upon corporations, they ALWAYS result in two different profit calculations.

        If you do not understand this basic fact, you should not invest your money in anything other than a savings account.

        Or you can get Congress to change IRS and SEC accounting rules. Good luck; phone us when you are done. In the mean time, do not blame corporate managers for following two sets of federal regulations.

        • Wolf Richter says:

          Chip, what Nick is saying is that tax accounting and financial accounting should be the same.

          And guess what: it’s essentially the same in a number of countries. And it works.

          Yes, for tax purposes, there are additional complexities, for example, in which country the profit was earned to be taxable in a particular jurisdiction. But these things are easily solved.

          I’ve been advocating this for years. You can cut the tax rate quite a bit if you tax the profit as established under GAAP (after adjustments for profits earned in other jurisdiction, etc.)

          This way, if companies want to inflate their profits, fine, they’ll just pay taxes on their inflated profits.

        • d says:

          I understand the difference .

          I also understand the corporate America, and corporate Americans, are as bent as 3 dollar notes.

          So many of the globes financial problems stem, from the fraudulent American system’s.

          NINJA loans for drug dealing house flippers, to launder their drug cash.

          Only in America.

          As wolf says in some country’s there is only tax standard account.

          I do accounts in one of them IT WORKS.

  3. night-train says:

    If these activities weren’t harming so many, they would be great material for an SNL bit. BTW, I have a little money to invest. Anyone know where I can find a game of 3 Card Monty or a crap game in an alley? I prefer to do business with a more ethical outfit than the Wall Street types.

    • Chip Javert says:


      Well, it depends upon how much you know about investing. Sounds like you might have cut a couple econ classes.

      MAGIG RULE: IF You cannot read the financial statement of the company you propose to invest in, DO NO INVEST IN IT. If you still intensely want to “invest”, buy an index fund. If you do not know what an index fund is, put your money in a savings account.

      Of the millions ignorant people who invest in the stock market, a tiny %age actually make money for a period time. The rest get screwed.

      If you consider ignorance to be an actual qualification for investing in the stock market, put your money in a savings account.

  4. Mark B. Spiegel says:

    That new SEC guidance doesn’t allow any written corporate reference to non-GAAP revenue anywhere– not in any filing (presumably including the earnings press release which files as an 8-K) nor on the company’s web site (which presumably includes any investor presentations).

    As the sell-side is spoon-fed its numbers straight from the companies I suspect that it will in fact have to change its research models, and thus anticipate a 30% haircut for the Tesla numbers. The SEC announced this rule just last Tuesday and Goldman & Morgan Stanley jammed through the Tesla deal the following day, without mentioning it at all in the prospectus. A timing coincidence? I think not.

    • Petunia says:

      A note on research models:

      Many outside of the financial industry think that research models are set in stone and used over a long period of time. Nothing could be farther from the truth. The research models are changed daily, weekly, monthly, as the “need” arises. Usually the need comes from an analyst needing to “correct” whatever guidance was given before. Not only are the models changed, but the data is never restated to adjust the data given out before. What the lack of restatement means is that the chart with data shown overtime was created, at each data point, with potentially different models. Yes, it is FU but that’s how it is. When I worked on Wall St. we use to call them the models du jour.

  5. Kevin C. Smith says:

    Those are my principles, and if you don’t like them… well, I have others. Groucho Marx

  6. wholy1 says:

    Which ‘media”? The MSM will do as it’s told. Anybody really think anything at the SEC has changed since the decade-old Madoff cover-up finally outed himself?

  7. bead says:

    Everybody WANTS to be fooled. How do you lie to somebody who doesn’t care? Or maybe this gives the board a plausible excuse to shrink the company further. In any case it can’t hurt the stock when we are continually admonished that the stock market is forward looking (for what it’s worth Wall Street advice is full of self-contradictions). What matters is that mirage six months out. The medicine will finally take and recovery is near. Maybe everything is wonderful once credit card balances clear one trillion (latest funny from perma-bulls).

    One more Wall Street scrape-off of retirement money will lead to very ugly politics, even uglier than what we’re seeing now. That would be three strikes.

  8. Ptb says:

    For an industry with such a complete regulatory capture, it’s quite a statement that the boss of the SEC should come out publically to admonish them.
    She must be getting worried enough to perform this CYA manouver for when it all blows up.

    PS: having studied accounting in the old days when gaap actually meant something, I find all these tricks nothing short of fraud.

    • OutLookingIn says:

      “nothing short of fraud”
      Wall street captured SEC is a fraud.

      An SEC 5 year investigation into silver market manipulation revealed ‘no wrong doing’! Yet, recently global banking cartels have come out and admitted it!

      What the SEC is doing – is essentially nothing.
      Admonishing Corporate America
      May consider new regulations
      Sending a message
      Going to continue talking about it
      New guidance issued
      Opportunity for companies to self-correct

      Take control back of the SEC away from Wall street and start prosecuting, not only corporations but their top executives, and punishing with not only hefty fines but prison time.
      If this was done you would soon see truth return to accountancy.

      • Chicken says:

        “What the SEC is doing – is essentially nothing.”

        Absolutely incorrect, SEC is well paid for assisting their Wall Street offshore criminal enterprise employers. Ditto for the US FED and central banks

        • Chip Javert says:


          And your evidence “for assisting their Wall Street offshore criminal enterprise employers” is exactly what?

          That you say so?

          We may have a bunch of crappy laws passed by the congress that voters put in office, but that’s not necessarily the regulators (eg sec) fault.

          A $500,000 Wall Street Banker will ALWAYS be smarter than a $60,000 regulator.

  9. NotSoSure says:

    How can we maintain the Murica way of life otherwise? And of course we are still better than China and every other country out there. Why? Not sure, but USA, USA …..

  10. Shush says:

    Keep the Party Going! Shushhhhhh

  11. nick kelly says:

    When the SEC used to drop in on Bernie Madoff, sometimes at the request of the gentlemen who insisted his perpetual consistent 12 % return was mathematically impossible, they would sometimes inquire about dropping of a resume.

  12. Chicken says:

    Perhaps all we need do is look at treasury receipts?

    • Petunia says:

      If they get away with all the made up accounting, is it any wonder they don’t pay taxes. They don’t get punished, so they have every incentive to lie about what they make to the treasury too.

      • Chip Javert says:


        Exactly who are the “they’s” you refer to?

        Or is your moral authority enough to condemn a million corporate tax filers?

        Joe McCarthy used to pull this crap back in the 1950.

        If you got names & proof, lets see it.

        • Wolf Richter says:

          Here are some of them:

          It’s not the most recent report. But it’s the one I linked to a couple of years ago when I wrote about it. The principle and the actors are the same:


        • Petunia says:

          Thanks for the backup.

          There seems to be confusion on the part of commentators on how accounting methods affect taxable income. The basic difference is that the most accurate method of accounting, the cash method, doesn’t lend itself to convenient distortions. Money comes in and then it goes out and you depreciate whatever is allowed. Simple.

          The accrual method allows for more creative methods. What is a sale or expense is flexible, as well as, what is an appropriate method of depreciation for a particular class of assets. These distortions are being exploited to the extreme and even beyond. When you combine these distortions with even more deliberate distortions allowed by non Gap rules, you are now in fantasy land.

          These distortions are what allow a corporation that earns billions to pay no tax. The taxing authorities have a lot of leeway in accepting or disallowing these distortions. Politics really does control who pays and who doesn’t pay.

  13. Jungle Jim says:

    What worries me is not the earnings, it is what they have hidden off the books. I fear that we have a lot of Enron’s out there.

    • Petunia says:

      The fed itself is the biggest owner of junk out there. If they mark their book to market it’s probably over for everybody.

      • Kasadour says:

        Mark to market no longer exists. There is no if about it (I mean that respectfully). It’s all a complete fraud. These are crazy times.

    • r cohn says:

      Investors have been advised to focus on cash flow rather than earnings.Corporate financial engineers have responded to this by manipulating their reported numbers to pump up their free cash flow metric
      Three areas to question relative to free cash flow are
      1.Depreciation–I believe that this was the “red flag” with Enron.
      2 Stock compensation
      3.Off balance sheet leases.
      Of these three, leases are the most difficult to ferret out because they are not on the income statement,not DIRECTLY on the balance sheet and not on the cash flow statement,but are hidden in the financial footnotes

      • Agnes says:

        Before the gold went to “deep storage” at WestPoint it was suspected it had been leased out. No one know, certainly not me.

  14. Keith Carr says:

    This whole thing is an exceedingly malodorous crock of s***. These markets can only be day-traded now as it is too dangerous to hold overnight. Price discovery? Nah just a totally fictional exercise in central bank manipulation. The GAAP accounting issues are just symptomatic of a financial system on its last legs. Propping it up until the elections are over (will there even be elections in 2016?) and then they drop it like a hot potato. Stack physical metals peeps and get ready. It’s going down[someday]. Moar wealth transfer to the 0.01 percenters as usual.

    • Kasadour says:

      Absolutely. the dot coms crashed in 2000, housing market in 2008, it’ll be the banks in 2016. The ECB is already insolvent. I give it till sometime between October and December. I wouldn’t put it past the FED to crash this system by summer’s end, but I’m guessing it’ll crash itself in the fall.

      • GreenGrass says:

        ECB can’t be insolvant. It has a monopoly on the currency called euro. Since that euro is free-floating, no one can make a call on their foreign reserves exceeding what the bank holds (which the bank is under no obligation to sell).

  15. A couple of months ago Lance Roberts mentioned on his radio program that non-GAAP numbers used to be relegated to the back of the comnpany financial reports, but now are prominently put at the front of the reports to make things look better than they are.

  16. Kam says:

    The Federal Reserve has caused this disaster. Always ready to fund the criminal behavior of its’ cronies.

    If real interest on loans approximated risk, then money would cost 5-10% for companies borrowing to buy back their shares. As it is, the Fed is shoving this risk onto the backs of American taxpayers.

    But the risk is still there, whether the Fed and its’ cronies believe it or not.

    • Chicken says:

      I believe the FED are a criminal enterprise, they’re bought and paid for by special insider groups to enable theft of wealth.

      Either this or those special insider groups are frightened by the environmental impact that comes with growth, and are actually attempting to stifle or manage down, said growth.

      Regardless, the FED is working for them.

  17. SaveUs says:

    On April 2, 2009 The USA goes from Mark to Market accounting to Mark to Model accounting. On May 1, 2009 Canada goes from Mark to Market accounting to Mark to Model accounting. This was the start of the slippery downhill slope for our world financial system.

    • Chicken says:

      It’ll be interesting to see how well this new plan works in comparison to the previously failed plans.

      I have serious reservations, more like someone’s peddling a pile of s**t, not fertilizer, and it’s getting stinkier by the week. Green shoots turning brown, must be “fall”? (“Oh, but it was a great run!” = SCAM)

    • Agnes says:

      Thanks for the date that happened SaveUs. The pitiable part is that the mark to market was the consumers part of a legislative deal that made bankruptcy much more difficult. The difficult -to-get -bankruptcy part went into effect a couple of years before the mark to market part, which was only in effect for a few months I believe.

  18. bead says:

    Read a happy technician: “The topping process is coming to an end as the S&P 500 finally carves out a bottom.” Makes sense, doesn’t it? Wonderful breadth and you can have your bottom while you are almost on top! Improving credit conditions as demonstrated by the rally in corporate bonds! Sure, there are a few bankruptcies in a limited sector that will be readily contained. Take the anti-anxiety pill and party on. We’re bullish.

  19. Double D says:

    None of this is a new revelation. It’s been ongoing for many, many years. The SEC stepping in is like Moody’s back before the Financial Crisis ensuring top AAA ratings for insolvent institutions. It all a bunch of lies and deceit, collusion & corruption. This market should have tanked a long time ago. Investors hang on financial information every week. Things like API, CPI, GDP, FED speak etc. is rugurgitated over and over again, and it’s allways bullshit.

    People talk about China’s economy and the fact that nobody knows what’s real with their numbers. How is that any different than the U.S., Japan & Europe? Central Banks will do anything to keep the charade going for as long as possible. And corporations (aided by governments) will follow along. Why not? There’s no fear of retribution.

  20. r cohn says:

    Let’s take one simple item,stock based compensation.Compensation is compensation whether it is with cash or via stock.Maybe the company is not paying directly for stock based compensation,but the shareholders are paying for it via a dilution of the shares.How the SEC ever allows companies to report 2 numbers on compensation is just beyond comprehension.

  21. Kasadour says:

    It’s unfunny that the SEC is “waking up” to this blatant fraud. Like the fire department responding to a call made yesterday– well after the building had been fully engulfed in flames and collapsing into a heap of ash. What a joke. A sad, unfunny joke.

  22. St James says:

    If everyone is cooking the books, then no one is cooking the books.

    Look at real-estate. In California if three ‘like properties’ with similar comps are sold at a given price, hundreds of houses having comparable specs in a given area may all now be approved for loans at that price. (that was the way it was, not sure if that’s still the norm).

    So all a bank need do is approve three ludicrous loans and the rest follows! There is no govt oversight to the loan process as far as I know.

    So what’s real, where’s the limitation or predator to take down the ‘bad actors’ if everyone is bad? This is a ponzi scheme.

    • d says:

      And pay off the valuers.

      Some realtors I know, use exorbitantly expensive valuers, but the valuation is always within 3% of the retail, which the banks will accept.

      These days the banks no longer employ their own valuers for a second opinion.

  23. night-train says:

    As a young man starting out in the mid-70s, the wealthy people I respected all gave me the same advice regarding the stock market: Only invest the money you don’t need. If the money lost adversely impacts your financial security, don’t put it into the market. Sadly, the loss of defined benefit pension plans have pushed people into the markets who would have never invested otherwise.

    And now, as soon as the Wall Streeters can force the few remaining DFB pension plans, many of which are civil servants plans, into 401K plans, they will have total capture. Everyone will be in the same boat then. Only most will be rowing, while the special few enjoy cocktails on the Lido Deck.

  24. ML says:

    Investment used to be about becoming better off than now. Now it’s about investment. If everyone is investing then it must be ok.

  25. Keith Carr says:

    “Investing” is trading. Previously accepted investing best practices based on fundamentals are now null and void due to a complete lack of corporate morality in adhering to GAAP. Fundamentals are useless. And it is true that they are coming after your retirement benefits. Many being pushed into the stock market as the last place any yield at all can be found is a travesty.

  26. Fixing Wall Street isn’t a job for the SEC, it’s a job for RICO.

    • d says:

      Not Rico,

      That comes after Tax code, and I set of reporting numbers, consistent with IRS filings and tax paid.

      Congress wont fix the tax code, as its owners dont want it fixed.

      So to fix the tax code, fix Congress. Which also happen’s to be broken

      Campaign funding reform. Is the Answer to all of this.

      The 1 thing comrade sanders wont talk about. As he can only do what he does, under the current Opaque senate and congressional election campaign funding model

  27. Coaster Noster says:

    I see all these comments about taxing and accounting, and invariably reminds me that getting rid of the tax codes, and resorting to Artificial Intelligence to determine each business’s tax obligation, should be the ultimate goal of fair persons everywhere (IMO). Even 300 million taxable accounts should not be too difficult for an AI machine to decide what sliver of taxes every individual, as well as corporations such as Exxon Mobil and GE should pay, with this ultimate goal: maximizing the economic well-being of the USA. No matter what argument one might make about “fair”, an AI machine would have already known it and have vetted it.

  28. Tom McCloskey says:

    Not to worry, Wolf!

    Our venerable lobbyists and regulators are busy fixing the hairy problem of corporate financial disclosure–they’ll just cut public reporting in half, à la Reg S-K “modernization.”


    “Look, man, I ain’t fallin’ for no banana in my tailpipe!”
    –Axel Foley, Beverly Hills Cop, circa 1984

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