Techniques for Managing Earnings
Howdofirmsmanageearnings?Oneaspectofgoodearnings
managementisthecareandnurturingofanalystexpectations,
a practice that Microsoft perfected during the 1990s.
Executivesatthefirmmonitoredanalystestimatesofearnings
andsteppedintolowerexpectationswhentheybelievedthat
the estimates were too high.
8 Thereareseveralothertechniquesthatareused,andwewill
considersomeofthemostcommononesinthissubsection.
Notallthetechniquesareharmfultothefirm,andsomemay
indeed be considered prudent management.
- Planningahead.Firmscanplaninvestmentsandasset
sales to keep earnings rising smoothly. - Revenuerecognition.Firmshavesomeleewayasto
when revenues have to be recognized. As an
example,Microsoft, in1995, adoptedan extremely
conservative approach to accounting for revenues
fromitssaleofWindows 95 andchosenottoshow
large chunks of revenues that they were entitled
(though not obligated) to show.
9 In fact,thefirmhadaccumulated$1.1 billionin
uncountedrevenuesbytheendof 1996 thatitcould
borrow on to supplement earnings in weaker quarters. - Book revenues early. In an opposite phenomenon,
firmssometimesshipproductsduringthefinaldays
of a weak quarter to distributorsand retailersand
record the revenues. Consider the case of
MicroStrategy,atechnologyfirmthatwentpublicin
1998. In the last two quarters of 1999, the firm
reportedrevenuegrowthof 20 percentand 27 percent
respectively,butmuchofthatgrowthwasattributable