A report issued by analysts at Credit Suisse Group AG recently, indicates that earnings manipulation may be a problem for many of the companies on the S&P 500 (INDEXSP:.INX). Because of how Wall Street punishes companies which miss expectations, there is constant pressure on them to beat estimates and even their own guidance. However, the analysts’ research indicates that companies which perform better tend to be those that are “less likely to have manipulated their earnings outperform.” They based their report on “The Detection of Earnings Manipulation,” a paper by Indiana University professor, Messod D. Beneish.
Beneish listed eight factors which are indicators that a company might be manipulating its earnings. Using these factors, the analysts can give any company a score indicating how likely it is to “be an earnings manipulator.” The factors are: days’ sales in receivables index (DSRI), gross margin index (GMI), asset quality index (AQI), sales growth index (SGI), depreciation index (DEPI), sales, general and administrative expenses index (SGAI), leverage index (LVGI) and total accruals to total assets (TATA).
Using those factors, the analysts at Credit Suisse Group AG (NYSE:CS) were able to break down a guideline for which companies were most likely to be earnings manipulators. They found that overall, companies on the S&P 500 (INDEXSP:.INX) were more likely to be manipulators. They also found that certain sectors had “relatively high proportions of possible manipulators.”
Of the sectors the analysts studied, they found that Telecom, Industrials, Materials, Consumer Staples, Energy and Health Care were among the sectors in which possible earnings manipulators are most likely to be found. Within each sector, they also identified some possible earnings manipulators, many of which were big brands.
The analysts found that the companies which are most likely to be earnings manipulators include Safeway Inc. (NYSE:SWY), Avon Products, Inc. (NYSE:AVP), The Kroger Co. (NYSE:KR), Kraft Foods Group Inc (NASDAQ:KRFT), Nike, Inc. (NYSE:NKE), Whirlpool Corporation (NYSE:WHR), AT&T Inc. (NYSE:T) and Merck & Co., Inc. (NYSE:MRK).
They found the companies which appear to be the least likely to manipulate their earnings include: The Dow Chemical Company (NYSE:DOW), ConAgra Foods, Inc. (NYSE:CAG), Snap-on Incorporated (NYSE:SNA), Kellogg Company (NYSE:K), Hasbro, Inc. (NASDAQ:HAS), Yahoo! Inc. (NASDAQ:YHOO) and Starwood Hotels & Resorts Worldwide, Inc (NYSE:HOT).