Ask Matt: Can companies pad profit?

Q: Can companies pad results to beat expectations?

A: Companies are under incredible pressure to meet or exceed investors’ expectations. There certainly are games they can play, but pushing too far can be illegal.

Public companies are required to tell investors how they performed each quarter. Investors usually focus on how much the firm earned during the period, how much revenue it brought in and how that compared with expectations. If a company’s profit misses views, the stock can be punished swiftly.

Some companies go to great lengths to make the numbers. One of the most common methods — which is legal — is setting the bar low. When a corporation reports quarterly results, it often will often guidance for future quarters. Some companies might steer analysts down with future expectations at levels that are easy to beat.

What is not allowed is bending the accounting rules just to beat expectations. There is still some latitude here. Many analysts and investors ignore profit measures that follow standardized accounting rules anyway and instead use “proforma” results. It’s legit since analysts can’t forecast special items. But companies have more leeway in setting proforma results. They are required, though, to disclose the adjustments being made.

Paste BN markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.