Earnings Management

Earnings management means purposely targeting specific earnings results. Not in the sense of "let's all work hard and close this sale so we can make our earnings target!" But rather...in the sense of purposely manipulating earnings through the use of accounting tricks.

One common ploy is known as "stuffing the channel." This move entails pressuring customers to buy a lot of product up front in order to book the sales in a particular quarter.

So if the company is on track to miss its earnings target in the fourth quarter, it might stuff the channel, moving up all the sales it can in order to hit its expected figures. The tactic essentially steals revenue from future quarters, but that's a problem for future quarters.

Another potential move might involve the opposite ploy. A company is running well ahead of its earnings target for the current quarter. So it purposely puts off closing some deals until the following quarter, so it can get a head start on that earnings goal.

It would be like joining a bowling league, purposely rolling sub-100 games the first week in an effort to generate an abnormally large handicap, and then absolutely destroying the competition for the rest of the season with the help of the enormous handicap inflation. Not that we at Shmoop would advocate such a move, though we are four-time league champions. (However, it should be mentioned, we've never actually competed in the same league more than once, and there are some bowling alleys where we are decidedly not welcome.)