In 2007, value investor David Einhorn wrote a fascinating book titled “Fooling Some of the People All of the Time: A Long, Short Story”, which is about how companies over the course of the business cycle begin using accounting tricks and the indifference of stock investors as long as stock prices are rising. This “accounting cycle” is intimately connected to the business cycle. In boom times, businesses can easily get away with creative (though, in many cases, perfectly legal) accounting methods, only to be corrected by markets when a recession sets in. I argue that the current cycle is nothing different. And I will share a few cases which prove my point.

Netflix: Accounting for Content

Tesla: The Gross Margin Charade

Alphabet, Procter & Gamble & Microsoft: The Non-GAAP Earnings Inflation

Source: Thomas A. King in Strategic Finance

Source: IBES, Deutsche bank, zero hedge


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