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Creative Accounting, EBITDA, and Core Earnings

  • Dimitris N. Chorafas

Abstract

Many companies are prone to use financial levers, such as gains from their pension funds, to boost reported profits. Until recently, this was a legal accounting practice, but many investors say it gave an overly rosy view of company results. After the 1999–2002 problems, increased scrutiny of accounting practices means that companies have to be very careful about how they beautify their bottom line. They now have to:
  • Release more data to regulators and shareholders in their Annual Reports

  • Avoid practices which the market considers distortions of accounting procedures

  • Stop leveraging their profits by mixing pension fund gains and other one-off or non-core items, and

  • Distinguish intellectual property income as a separate line item, instead of combining it with general management to make overhead expenses look lower.

Proforma financial reporting, in which each company draws up the accounting presentation as it pleases, and accounting manipulations like earnings before interest, taxes, depreciation and amortization (EBITDA) have made investors very careful about the financial numbers they are getting. Increasingly, stakeholders have come to understand that in the corporate world it is not exactly black and white when it comes to accounting procedures.

Keywords

Corporate Responsibility Free Cash Flow Income Statement Corporate Financial Performance Financial Account Standard Board 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 3.
    D.N. Chorafas, Alternative Investments and the Mismanagement of Risk, London, Euromoney, 2002.Google Scholar
  2. 5.
    Basel Committee on Banking Supervision, “Public Disclosure by Banks: Results of the 2000 Disclosure Survey,” Bank for International Settlements, Basel, May 2002.Google Scholar
  3. 6.
    Frank Partnoy, FIASCO, London, Profile Books, 1998.Google Scholar
  4. 8.
    Dimitris N. Chorafas, Stress Testing. Risk Management Strategies for Extreme Events, London, Euromoney, 2003.Google Scholar

Copyright information

© Dimitris N. Chorafas 2004

Authors and Affiliations

  • Dimitris N. Chorafas

There are no affiliations available

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