Are U.S. Companies Really Making Any Money?

According to a recent report by Economy.com, they are not. The news from second quarter earnings is generally positive, with profits showing significant improvement, and in many cases beating expectations. To a certain extent, the improvement is real, as previous cost cutting efforts, the weaker dollar, low interest rates and improved pricing power have all combined to improve profitability. However, there is evidence that companies are up to their old chicanery, and as such, the recent gains in the stock market may be premature.

It has been more than a year since company CEOs and CFOs were required to sign off on their books, but it appears that the quality of earnings has not improved much in the intervening period. Operating profits, which are those reported before extraordinary items, and are the ones that are generally highlighted by companies in their quarterly reports, are diverging again from corporate profits as reported in the national accounts. This is a disturbing déjà vu of what occurred in the late 1990s.

Companies are continuing on with their aggressive accounting tactics in the hopes that analysts and investors will overlook them in their desire for a return to strong growth in equity prices. To date, this strategy seems to be working. However, it also runs the risk of generating another crisis of confidence in accounting standards, such as what occurred following the Enron crisis and the other sundry bankruptcies that occurred over the past two years. Thus, it now appears that the Financial Accounting Standards Board, the organization responsible for setting accounting standards, will now need to enforce more conservative accounting standards if another loss of confidence is to be avoided.

Read more here, if you subscribe to Economy.com.