“Despite the bursting of the stock-market bubble, the discrediting of analysts’ research and exposure of a slew of accounting tricks that companies use to make their financial figures look better, the earnings-management game is alive and well on Wall Street,” writes Ken Brown in today’s Wall Street Journal.

” ‘I don’t believe there’s been a change’ since the passage of the Sarbanes-Oxley Act last year and other reforms, said Lawrence D. Brown, an accounting professor at Georgia State University, who has been studying the way companies present their earnings for 25 years.”

“Moments after the stock market closed last Wednesday, for instance, Apple Computer Inc. announced that it had earned five cents a share, topping analysts’ estimates by 67%. The next day, Apple’s shares jumped 5% to a 13-month high.”

“Never mind that Apple’s net income had fallen 41%, the computer maker had beaten Wall Street’s all-important consensus earnings estimate, which is based on the predictions of research analysts who cover the company. No one is saying that Apple is trying to manipulate its earnings. One reason for its success: Three months before, Apple told investors that it expected only a ‘slight profit for the quarter,’ leading analysts to predict that the company would earn a meager three cents a share.”

“As the bull market of the 1990s became more frenzied, companies played a high-stakes game with investors and analysts: Beat the expected quarterly earnings number, whatever the number was, and be rewarded. Miss it and face the market’s wrath.”

“A paper that Prof. Brown is writing with graduate student Marcus L. Caylor, said that beginning in 1994, investors reacted more harshly to companies that missed their number than they did to companies that reported lower earnings or even losses for the quarter. Not surprisingly, corporate executives caught on quickly. ‘They made this notion of avoiding a negative surprise their main priority,’ Prof. Brown said.”

“The earnings surprise developed into a ritual full of winks and nods among chief financial officers, Wall Street analysts and big money managers — and many won praise at the time for big share-price gains. The CFOs had the most delicate task, trying to say things were getting worse, but not so much worse that it would scare away investors. The analysts played along because they could relay this information to their best clients and the money managers liked it because it gave them a jump on the competition.”

“The game changed — more in form than substance — in 2000 when the Securities and Exchange Commission’s Regulation Fair Disclosure went into effect. That rule prevented companies from calling individual investors and analysts and instead required the firms to release important information publicly. But companies adapted and began managing expectations using press releases instead of telephone calls.”