How Companies Inflate Profits Before IPO to Attract Investors

The months leading up to an IPO are often a frantic sprint, not a steady jog—boards and founders expect growing P&L, yet execution cracks begin to show. What typically gets lost is that these breakdowns are not grand strategic flops; they start at the operator level—spent marketing stays unspent, R&D freezes, headcount holds. The result: an uplift in earnings that feels real… until it isn’t. As someone who’s walked through the CFO and CEO war rooms across Asia, China, and the US, I’ve seen this pattern repeat: the delayed cost recognition, revenue pushed into the run-up, capital gearing tightened to perfection. Yet the core dysfunction—control mismatch, cadence misalignment, and distorted signal loops—is rarely addressed. This article exposes that dysfunction, drills into a system-level solution, and shows how fixing it restructures both your P&L and your capital story.

A short pivot: before we get into the remedy, pause. Look around your own team. Does audit timing feel politically charged? Do forecast decks feel polished into optimism without operational credibility? That’s your signal. Let’s unpack why it’s happening—and fix it properly.

How Companies Inflate Profits Before IPO Through Operational Shortcuts

In the lead-up to an IPO, companies often lean into delaying discretionary spend—hiring, training, marketing—morphing quarterly results into something they aren’t. These tactics do lift earnings, just inflate profits before IPO, but at the cost of throughput, team health, and long-term viability. What’s more disturbing is this starts to look like disciplined capital allocation, even though it masks underlying operational drag.

The mistake lies deeper than expense timing. By pulling spend forward, finance teams create cadence instability. Forecasting becomes reactive—doubling down in Q3 to hit Q4 without reflecting true growth. Forecast loops stretch, and signal trust fractures. Execution teams get frustrated when headcount approvals vanish mid-cycle, or backlogged campaigns flood launch windows. Meanwhile, investors applaud—until the post‑IPO reality check wipes out the illusion.

Academic studies confirm this. Teoh, Welch, and Wong (1998) identified that firms inflate earnings pre-IPO and then revert to true performance afterward. EY reports from Q1 2025 show that IPO candidates are under pressure to post profits; the number of profitable IPOs in the US jumped from 29% to 59% year-over-year—but the quality of that earnings is uneven. Under those conditions, finance leaders think the goal is to hit the profit target, not to build a clean mechanism that supports year-over-year growth signals.

Structural Fix—Aligning Forecast Cadence and Expense Control Loops

To stop gaming execution and start building a truthful profit narrative, the fix must operate at the system level—not on incentives or blame. You need integrated loops that tie commitment, cadence, and execution rhythm in a tight control system.

First, reset the forecast topology. Move from linear quarterly decks to rolling 12-week sprints with embedded expense commit reviews. Forecasts become forward-looking, not backward smoothed. These sprints enforce visibility: if a marketing campaign is delayed, the system flags the gap immediately—instead of stacking it into Q4 miracles. This forces cross-functional teams into realignment earlier; execution teams realign scope rather than scramble after the fact.

Second, restructure ownership. Tie expense approvals to workstream-level scorecards owned by operational leads, not finance controllers. These scorecards include throughput metrics—leads generated, deals closed, product shipped—not just dollars requested. Every expense must justify the activity pace. If hiring is deferred, that team must commit to a compensating plan (e.g., automation, overtime) to sustain cadence, or transparently reset targets. This creates clear accountability and visible trade-offs.

Third, embed a monthly "signal integrity" council of CFO, COO, and two operational VPs. Share forecast vs. execution variance, and call out tactics that distort signal (e.g., revenue pushed into this period or expense holdbacks). The goal is while on the way to “profits,” you continuously ask: is throughput real? This council is not about finger-pointing—it’s about pushing execution integrity.

Impact: Clean Earnings, Credible Value, Cultural Leverage

Once the new loops take hold, two things happen in tandem. First, headline earnings may dip compared to the pre‑IPO spike—but the trajectory becomes explainable and repeatable. In one SEA-based SaaS scale-up I advised, EBITDA was 15% lower than forecast in the quarter before listing, but post-IPO, revenue growth held at 25%, expense burn stabilized within a 3% variance, and investor trust doubled. The market rewarded the credibility, not the peak profit.

Second, signal trust restores across the org. Execution teams stop hoarding scope because they know trade-offs will play out early. Finance gains a reputation for partnership over gatekeeping. That trust reduces political friction—leading to fewer emergency budget escalations, and lower stress around earnings calls. The long-tail consequence: cleaner capital allocation, lower cost of capital post-IPO, and a board that leans into strategic growth, not forensic accounting defenses.

Reflective Questions

1. What cadence mismatch do you tolerate today—where smoothing profits feels tactical, not strategic?

2. Are your approval loops anchored in execution throughput, or just vanity metrics?

   
   

Earnings engineering isn’t illegal; it’s human. But allowing short-term gains to obscure operational truth is a root dysfunction. By sequencing forecast cadence, expense ownership, and signal governance into a single system, you tear away the illusion—build leverage, not smoke.