There are four reasons why earnings are a poor measure of performance compared to changes in shareholder value. First, unlike cash flow, which underpins SVA, accounting earnings are arbitrary and easily manipulated by management. Different, equally acceptable, accounting methods lead to quite different earnings figures. Prominent examples include alternative ways to compute the cost of goods sold (LIFO versus FIFO), different methods of depreciating assets, and the various choices in accounting for mergers and acquisitions. Different countries have different accounting regulations too, so international companies are frequently quoting different earnings on different stock markets. Not surprisingly, the flexibility of reporting procedures gives management ample opportunity to manipulate.
