When a Penny Matters?

I was reading an article in Accounting Today (yes, there are magazines about the accounting profession) about how publicly traded companies are rounding up their earnings more than normally expected.  For example, the authors reviewed the earnings announcements for over 330,000 positive earnings announcements from 1995-2009.

With that big  of a sample size, you would  expect rounding up and down to be almost exactly 50/50.  However, they found (surprise/surprise) that about 53% were rounded up and only 47% were rounded down.   When earnings per share were 20 cents or less, they found 59% rounded up.

They were able to identify approximately 320 companies who had a history of  consistently rounding  up and one company had rounded up every quarter for 42 straight quarters.

We, as accountants, normally have a materially level that can be either very small or larger based on the situation, but these  examples of companies rounding up were abusing the trust of their readers and investors.  They were trying to make their earnings look better than they really were.  Any reader of the financial statement could calculate the actual number, however, the company knew that the  general public normally does not do this.

The bottom line is that a penny can matter in many situations.

 Paul Neiffer, CPA