The profits published by US companies are defined in a very different way from those published in the National Accounts (NIPA Table 1.14) and in recent years they have increasingly diverged.
Those published by companies have become even less “honest” than they used to be. This is the result of the much greater incentives for management to alternately over- and understate the “true” profits, and the much greater ability to do so.
The massive rise in bonuses paid to managements, which depend on the data the companies publish, has encouraged companies to boost profits in the short-term as bonuses often depend on short-term changes in earnings per share or return on equity. Even when they are more directly related to changes in share prices, these often respond to similar changes in the published data. Parallel with this rise in incentives to misrepresent profits has been an increasing ability to do so, with the change from “marked to cost” to “marked to market” accounting.
The result might be compared to the increase in theft that we might expect if windows and safes had to be left open by law, and items stolen were declared to be the lawful property of the thieves. Read more