From the Wall Street Journal comes this revelation:
If you believe a recent academic study, one out of five U.S. finance chiefs have been scrambling to fiddle with their companies' earnings.Yes, the surprise here is that it's only one out of five.
According to academic experts, many CFOs use clever, and legal, exploitations of accounting standards that "manage earnings to misrepresent economic performance." Duke Professor John Graham and WSJ's Francesco Guerrera discuss on The News Hub.In my 37 years in corporate America, I saw plenty of evidence of this phenomenon. When all other corporate missions (like the quaint notion of providing a quality product or service to a client at a fair price) are subordinated to "the numbers", you see otherwise intelligent and ethical people do some very shady things.
The sources of this revelation are none other than the CFOs themselves. Last year, the academics asked 169 finance chiefs of public firms what percentage of companies, in their experience, use accounting ruses to report earnings that don't fully reflect the companies' underlying operations. (Note the indirect nature of the question to avoid self-incrimination.)
The answer: around 20%.
Wall Street could care less about the quality, price, or sustainability of your offerings. What they want to see is consistency. If "the Street" is expecting your earnings for the quarter to be X, and you come in at 0.9X, you've missed by a mile. How you attained X is not their concern either. You could have moved money out of your rainy day slush fund to make up for a crappy quarter. You could have claimed "restructuring costs" after your shell-game series of acquisitions. Just make sure you come in on target.
While the Chief Financial Office (CFO) takes care of some of this "big picture" manipulation of results, what surprised me in my corporate career was the degree to which middle managers and supervisors, and even "regular" employees were drawn into the web of accounting shenanigans. When that kind of thinking pervades an entire company, it's only a matter of time before some people take it to an extreme.
When monthly and quarterly financial results are the basis for managers getting their all-important bonus, the pressure on the employees to meet "their" numbers can be daunting. Ironically, as managers crack the whip on the employees, the employees realize their true power in the equation: they can dig in their heels and prevent their boss from getting that bonus. Sure, it might be a career-limiting move, but in a dysfunctional organization, this kind of passive-aggressive behavior is quite prevalent.
Employees, resentful over having to work longer hours without compensation, or having to live under the constant threat of layoffs, or being pressured to do something ethically dubious, have plenty of reasons to thwart their [already overpaid] manager's bonus quest.
One way to affect the numbers at the local office or department level is in the recognition of revenue. In a difficult quarter, there's a great temptation to claim revenue that really belongs in the next quarter. Sure, the client hasn't signed that contract yet, but maybe (wink, wink...) we can still count it as "booked". In a good quarter - one where the numbers were exceeded - there's pressure to defer some revenue to the start of the next quarter.
Never mind that all staff are repeatedly required to "recertify" their compliance with the company's Ethics and Integrity Program.
I worked in an office where the manager was a master at this sort of revenue sleight of hand. He was always held up by our executive team as a fiscal savant. "Why can't the rest of you folks turn in this kind of performance?", they asked. He not only got his bonus, he was further rewarded for his great leadership. You clever Kossacks know what happened next, I bet.
Yep. Like burned popcorn in the break room, the aroma of cooked books was too strong to ignore. The one-time poster boy for awesome office performance was terminated, auditors pored over the carnage, and everyone in the office wondered how this obvious manipulation had gone unpunished for so long.
When you live by the numbers, it shows. All decisions are subordinated to the effect on the numbers. Employees quickly realize that they're expendable (as I was). They're just cells on a manager's spreadsheet. Clients see staff turnover increasing, service eroding, and costs escalating. Managers, no longer interested in developing or mentoring their staff, focus on the numbers, doing everything they can to make "their" number and get their bonus. "Long-term" planning is abandoned in favor of this quarter's numbers. Next fiscal year, they promise, we'll focus on the employees. Right now, though, we just gotta get through this quarter.