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Earnings Manipulation

Definition

This occurs when profits (earnings) are made to appear higher than they actually are by distorting the accounting around calculating earnings. The company's management often does this by utilizing what is known as cookie jar, contingency or rainy day reserves to prop up regular earnings when earnings are not going to meet analysts' forecasts. Earnings Manipulation is also sometimes called "managed earnings" and "earnings management".

Using the term Earnings Manipulation :

It is sometimes very difficult to detect earnings management. Corporate executives typically will take big charges to earnings (or establish large reserves more commonly) when things are at their extremes such as very bad or very good economic climates. This allows them to smooth earnings in later years by dipping into the reserves (aka "releasing the reserves") when needed.

Pay Special Attention To :

Earnings manipulation is a serious issue. You have to work very hard to detect it and decide what actions to take when you do. Some experienced investors will seek out earnings manipulators and short their stock in order to profit from their fall when the market discovers it. Shorting ( short selling ) is hard and risky work though as well. It should normally be attempted only by professional investors due to the risk involved.

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Related terms

Accounting , Price to Earnings Ratio , Multiple