12/14/98 REPLAYING THE CORPORATE NUMBERS GAME

REPLAYING THE CORPORATE NUMBERS GAME

In ''Playing the earnings game'' (Editorials, Nov. 23), you suggest that it's common practice for investor-relations people to talk to the analysts who cover their company to get them to lower their earnings estimates. The goal is to ensure that investors' assumptions about the coming quarters are consistent with those of the company's management.
Your assertion that IR people ''even invented something called 'whisper numbers' that they pass on to analysts [not the investing public] just days before release of the real profits statement'' is incorrect. The first derivation of ''whisper numbers'' was the invention of sell-side analysts who whispered to selected clients earnings numbers different from published estimates. More recently, some whisper numbers have evolved from companies that consistently underpromise and overperform in their earnings. In these cases, analysts stick with their published numbers but, again, whisper a higher number to selected professional-investor clients.
If a company were to follow the alleged practice of passing on material information to selected analysts prior to publishing it, they have engaged in ''selective disclosure.'' It's illegal--not even a close call. Moreover, 77% of our members impose a ''quiet period'' for an average of 22 days before their earnings announcements, during which time they will not comment in any way on analysts' estimates.
Investor-relations people have worked hard to build relationships, harness new technologies, and disseminate information fairly for accurate valuations of their public companies.
Louis M. Thompson Jr.
President & CEO
National Investor Relations Institute
Vienna, Va.

On the basis of my 15 years' experience in investor relations, I have to say that contrary to the general practice you postulate, no corporation would assent to an earnings scenario that would be impossible to attain, no matter what temporary surge it gave its stock. Nor would any company find any longer-term upside in later ''pre-announcing'' that it cannot meet those earnings estimates. The estimate shortfall demolishes the stock price and erodes management credibility. And surpassing a reduced estimate calls management's forecasting abilities into greater question.
Most U.S. corporations are trying to generate consistently positive returns to shareholders. An important component of that effort is clear, consistent, and credible communications. Once sacrificed, credibility is very hard to regain. No right-minded manager throws it away for a short-lived boost in share price. Your scenario can hardly account for a bull market in the face of a temporary lull in earnings growth.
Brian Maddox
Senior Vice-President
Morgen-Walke Associates
New York

Your comments are on target. However, there is another game being played. Ironically, a perfect example can be found in your report on the third-quarter profits for 900 companies (''And you thought last quarter was bad,'' Corporate Scoreboard, Nov. 23).
MCI WorldCom Inc. is No. 1 on your list of ''who lost the most,'' with a staggering loss of $2.9 billion. One might expect that the newly merged entity had a calamitous first quarter. But the ''loss'' includes a write-off of $3.2 billion of ''purchased research and development''--the amount WorldCom paid for MCI's in-process R&D. The consequence of this immediate write-off is the avoidance of a gradual write-off over future periods (the traditional accounting for purchased assets such as buildings, equipment, and goodwill). Thus, future earnings will be unencumbered by this cost of doing business.
Virtually unheard of prior to the 1990s, this accounting has become commonplace. It is one of the games that Security & Exchange Commission Chairman Arthur Levitt Jr. sees as a threat to the credibility of the U.S. financial reporting system. In fact, MCI WorldCom originally wanted this write-off to be $7 billion, but the SEC insisted that it be reduced to ''only'' $3.2 billion. Thus, the earnings game includes not only the management of analysts' expectations but also the management of the earnings figures themselves.
John P. McAllister
Professor of Accounting
Kennesaw State University
Woodstock, Ga.