Are Recent Profit Increases for Real?

Not for some companies.

TranSwitch is one of scores of companies using a little-known accounting technique that can make financial statements look healthier than they otherwise would. The practice entails reversing big charges that companies took in the past for inventory write-downs or other issues. It is especially prevalent among technology companies that got hit the hardest in the past few years. A BusinessWeek investigation of 255 tech companies that took special charges in recent years reveals that at least 42 have gained some benefit from reversals. Of those 42 companies, 28, or two-thirds, did not disclose the benefit in their earnings releases. Besides selling written-off inventory, companies profited from reversing lease terminations, tax liabilities, severance costs, litigation charges, equipment-cancellation fees, and other restructuring fees. "The biggest accounting trick people are not even aware of is unwinding special charges," says Howard Schilit, an accounting expert and director of the Center for Financial Research & Analysis.

Has anyone read the book Quality of Earnings? The author used to publish a newsletter about stocks whose earnings should be questioned. I wish someone would start a blog along the same lines. I don't think there is anything out there like it right now.