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Chapter 8. Earnings Tricks and Games: Ma... > Red Flag 6: Using Aggressive Pension...

Red Flag 6: Using Aggressive Pension Fund Assumptions to Reach Earnings Targets

In the second half of 2002, many companies were waking up to a massive hangover as they realized that the days when they could drive up their earnings with gains from their employee pension funds were fast coming to a close. Indeed, negative returns on pension fund assets because of the plummeting stock market mean that many face a deficit in funding their company pension plans, and instead of recording windfall gains, they are having to stump up cash and take a hit to earnings. A study by Credit Suisse First Boston, published in the autumn of 2002, estimated that of the 360 companies in the Standard & Poor’s 500 index that have pension plans, 325 were set to have shortfalls by the end of that year. According to the study’s author, David Zion, in dollar terms, the shortfall was estimated to reach a staggering $240 billion. “It is a huge issue because pensions have been almost a profit center for some companies, and we think that the rate of return assumptions are too high and there will be significant shortfalls because the market is in decline,” said short seller David Tice.


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