Managed Earnings

Corporate profits made to appear higher than they actually were by accounting devices, usually with the aim of meeting analysts' projected earnings per share. Cookie Jar Reserves sometimes called rainy day reserves or contingency reserves, can be overstated in good years, then reversed in bad years to reduce expenses and increase earnings. Other examples are overstated, one-time "big bath" charges for restructurings, taken in good years and used in weak years to bolster earnings, and creative acquisition accounting. Earnings management issues became a focus after the 2001 Enron debacle and were a factor prompting the Sarbanes-Oxley Act of 2002.

Manipulating (pumping up or down) earnings to shed a more favorable light on companies. All companies have flexibility in how they account for some revenues and costs. For example, they can depreciate a capital cost (say, a fleet of cars) in one year or over several years. If they take it in one chunk, their earnings look lower that year and larger every year after that. If they report it in many smaller pieces, they avoid the big hit in the first year. Even though earnings are not perfect, investors' love affair with earnings is here to stay.