Analysts love to talk about “earnings.” If earnings beat expectations, they say it’s a reason for the stock to go up. If earnings are lower than expected, the stock should go down. The price-to-earnings ratio is the most common valuation metric in the financial media.

You might think, given their prominence and the fact that the Financial Accounting Standards Board governs their calculation, that “earnings” reflect a company’s profits.

Instead, GAAP earnings are subject to a number of accounting loopholes and distortions that cause them to diverge from true cash profits. CFOs themselves admit they frequently exploit these loopholes to prop up earnings and ensure management gets their bonuses. Read More