No more earnings estimates

NEW YORK – The gaming of company earnings is so widespread and pervasive, it has created a condition known as “the cockroach effect.” When a company that usually meets earnings estimates misses a quarterly target by a penny, the stock gets creamed. The reason: Investors assume it used every trick in the accounting rule book to get that close, yet still failed.

“If you’re managing earnings, and you miss by a penny, there must be a lot there,” said Jeffrey J. Diermeier, president and chief executive officer of the CFA Institute. Just as seeing one cockroach is a sign many more are lurking, accounting tweaks seldom travel alone.

The CFA Centre for Financial Market Integrity and the Business Roundtable Institute for Corporate Ethics on Monday issued a set of recommendations crafted to end what they call “short-termism,” one symptom of which is the boosting and busting of a stock based on its quarterly earnings.

The organizations’ boldest suggestion is an end to quarterly earnings estimates. Instead, they’d like to see companies provide more meaningful, and potentially more frequent, communications about strategy and long-term vision.

As John Bogle of the Vanguard Group said: “The role of management should not be beating abstract numeric estimates but improving the operations and long-term prospects of organizations.”