When earnings bear closer scrutiny: what should CEOs do to avoid embarrassing blow-ups over reported earnings?

Summary

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Pressure from Wall Street is compelling many public companies to try to meet earnings expectations and inflate their stock prices any way they can. In his 1998 annual report to other Berkshire Hathaway shareholders, renowned investor Warren Buffett expressed his concern that such pressure will motivate some managers to manipulate earnings if they cannot raise them through legitimate means. He fears that many CEOs are not only coming to believe that manipulating earnings is an acceptable practice, but actually their responsibility. A number of chief executives share their views on how to prevent accounting problems. Allied Capital Chmn and CEO William Walton recommends zero tolerance for any improprieties, while TIAA-CREF CEO John Biggs cites the importance of open communications between audit committees and management external auditors.

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Extract

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When earnings bear closer scrutiny: what should CEOs do to avoid embarrassing blow-ups over reported earnings?

In his 1998 annual report to fellow Berkshire Hathaway shareholders, Warren Buffett, the venerable stock investor, unloaded a lengthy and targeted barrage at executives who allow - and even encourage - slipshod accounting practices in their businesses. "The attitude of disrespect that many executives have today for accurate reporting is a business disgrace," he charged.

What has the Oracle of Omaha so riled? A strong sense that in Corporate America, "taking care of business" now takes on a more ominous meaning. Wall Street puts enormous pressure on public companies to meet earnings expectations and to prop up their stock prices, Buffett notes. He's concerned that some managers are apt to manufacture earnings when they are unable to achieve them through the normal channels of sales and operating e...

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