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TheStreet Open House

Earnings Forecasts: Voodoo Science, Pt 2 of 2

Click here for Part 1 of Earnings Forecasts: Voodoo Science

NEW YORK ( TheStreet) -- Garbage numbers in, produces garbage earnings forecasts. But getting rid of the garbage numbers isn't easy in developing countries, where they are a natural byproduct of the culture.

In some cultures, people will forecast what their managers expect because they fear the consequences of disappointing the boss. In others, it's foolish to be forthright with financials, because it can encourage government scrutiny, unsavory toll collectors or additional taxes. In still others, managers see businesses as a vehicle for maximizing personal wealth, for example, through asset stripping and nepotistic contracts.

Another source for garbage numbers is under-skilled managers. The U.S. tops the charts for effective management. At the bottom are developing countries. It makes sense.

Business schools are just developing, and for many, effectively growing a business is a relatively new concept. The 39 countries with a history of communism also have a history that includes little use for business merchants. With the introduction of economic reforms, entrepreneurs from these countries have had to build their business educations from scratch, operating in environments plagued with corruption and in-process rule making.

Then there are managers, like those in many countries in Africa, Latin America, and Asia, where businesses have been controlled by a family or by a majority shareholder, for ages. Maximizing value is often a personal issue. Working in a JV or as a merged entity, they could easily deliver forecasts in January that no longer fit personal opportunities in June. Old habits can die hard.

Some might think that the threat of punishment for the obviously illegal actions just noted will limit those behaviors. However, almost all developing countries have immature legal systems, where law enforcement is more concept than reality.

If the police come knocking, or a case does make it to court, there are ways to make things disappear. This is the reason two-thirds of the world's countries scored fewer than 50 points out of 100 on Transparency International's Corruptions Perceptions Index. Get outside the developed countries, and corruption is rampant, because there is nothing to stop it.

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