Who Are You Going to Trust, Adjusted Earnings or Your Lying Eyes?

Corporate executives and their accountants have long contended that the use of adjusted earnings, which ignore costs like acquisition expenses, interest payments or just about anything they find inconvenient, gives investors a better picture of companies’ performance. Under no circumstances is it manipulation, they say. But a new study suggests it just might be.

The study, which will be presented for the first time on Tuesday at the American Accounting Association’s annual meeting, found that over the past decade or so, as more and more companies have shifted to emphasizing adjusted earnings, the percentage of companies in the S&P 500 Index that consistently report better-than-expected earnings by a relatively wide margin on that basis has increased. But those same companies’ results under generally accepted accounting principles, or GAAP, often only match or slightly exceed analysts’ predictions.