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20% of US Firms Cook the Books During Earnings: Report

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It's earnings time again and Wall Street is chomping at the bit for more information about the health of Corporate America.

Alcoa (AA) and Yum! Brands (YUM) kicked off the unofficial start to earnings season after the bell Tuesday. Safeway (SWY) reports Thursday, and JPMorgan (JPM) and Wells Fargo (WFC) report Friday.

But a new report by finance professors at Emory and Duke University raises questions about the quality of earnings in general.

In an anonymous survey of CFOs last year, the study found that at least 20% of companies are "managing" earnings and using aggressive accounting methods to legally alter the outcome of their earnings reports.

Alcoa (AA) and Yum! Brands (YUM) kicked off the unofficial start to earnings season after the bell Tuesday. Safeway (SWY) reports Thursday, and JPMorgan (JPM) and Wells Fargo (WFC) report Friday.

But a new report by finance professors at Emory and Duke University raises questions about the quality of earnings in general.

In an anonymous survey of CFOs last year, the study found that at least 20% of companies are "managing" earnings and using aggressive accounting methods to legally alter the outcome of their earnings reports.

What may surprise you is that these accounting methods used by CFOs to "manage" the numbers are completely legal.

Professor John Graham of Duke is a co-author of the report and joined The Daily Ticker's Aaron Task to discuss the report's findings.

Of the 20% of companies that manipulated their earnings to hit a target, Graham says, a surprising 40% did so to the downside, not the upside.

Why would companies downplay their numbers? To pad and improve future quarters' earnings.

"It does cause you to pause a little bit and think how should an investor interpret earnings numbers when they hear those announcements," says Graham.

He says investors should not put too much faith in one individual earnings report and suggests looking at companies over the long term. Graham argues that cash flows are a better baromoter than earnings.

The CFOs surveyed in separate report by Graham said they expect earnings to increase 6% over the next year.

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