Infographic: Earnings Management, Developed vs. Emerging Markets

In terms of ROE distribution, developed markets like the U.S. and U.K. (left) show a fairly even hump skewing just to the positive side of zero. Earnings management happens, but it’s barely visible. Chinese companies (at top, middle) take creative accounting to a whole new level, revealing an unnatural “cliff” at zero.

This turns out to be a common feature of emerging markets. A perfect storm of different reporting standards, weaker auditing and lax enforcement leads to reported numbers that are disconnected from actual results.

A quantitative multi-factor strategy can help investors distinguish companies with solid accounting from those playing fast and loose in their financial reporting, turning a serious risk into a unique opportunity

This post was originally published on LinkedIn

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