The New Numbers Game

If you look through the pages of this week's issue, it's clear that chief executives of companies big and small are facing a whole new world of financial scrutiny. It is no longer enough to deliver earnings growth. Now, in the post-Enron era, the focus is on earnings quality.

For too long, Wall Street's message was momentum: Think short-term and get in and out quick. As Associate Editor Marcia Vickers and Senior Writer Gary Weiss pointed out in "The Wall Street Hype Machine" (Apr. 3, 2000), "So far the pain has been limited by the market's overall advance. But if the market turns south, the disappointment--and wreckage--will be considerable." And so it has been.

While it is easy to be suspicious of corporate earnings reports, showing how they mislead the investing public is a difficult task seldom undertaken on a large scale by journalists. Accounting shenanigans are hard to detect, understand, and explain accurately in everyday language.

Associate Editors David Henry and Nanette Byrnes accepted the challenge, and this past year have delivered a series of stories with clear and concise expositions of the gimmicks companies are using to pad earnings and keep investors guessing. The groundbreaking report, "The Numbers Game" (May 14, 2001), was built on Henry's detailed examination of dozens of companies, 34 of which were named in the text or tables. By clearly showing how corporations are using "pro forma" earnings and a half-dozen traditional ploys, the story helped galvanize the outrage of investors and regulators.

"Confused About Earnings?" (Nov. 26) deciphered the shortcomings of generally accepted accounting principles (GAAP) and offered a new standard based on operating earnings as a way out of the mess. When the nation's attention, from Main Street to Congress, was riveted on the Enron debacle, "Accounting in Crisis" (Jan. 28) proposed reforms that would reach to the heart of the conflicts that have damaged not only the auditing profession but the credibility of modern business culture. In "The Betrayed Investor" (Feb. 25), Vickers and Senior Correspondent Mike McNamee traced the road to disillusionment, as a barrage of shocks undermined investors' faith in equities.

Stock-trading as a national pastime, "buzz," and "pro forma" earnings are out. Long-term planning, top-quality companies, and solid earnings are in. So are green eyeshades. Put on yours and check out our new "The Fine Print" series in BusinessWeek Investor, most recently "Reckoning the cost of stock options" (Apr. 15).

Accounting questions have transcended corporate finance departments to become a concern of employees, managers, investors, and government. These extraordinary times call for journalism that is strong on financial analysis. You'll find it right here in this and every issue of BusinessWeek.

By Stephen B. Shepard, Editor-in-Chief

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