Earnings Reports Come Under Fire
U.S. lawmakers took aim Tuesday at the growing corporate practice of presenting financial statements two different ways: one to satisfy regulators, the other to put the best face on results.
Lawmakers and accounting experts at a congressional hearing offered words of warning to investors, saying so-called pro forma earnings statements may not present the truest picture of financial reality.
“My concern is that corporations are issuing pro forma statements on profitability that are not audited and in many cases that do not follow generally accepted accounting practices,” said Rep. Cliff Stearns (R-Fla.), chairman of the House subcommittee holding the hearing.
“Then the corporations issue an audited statement much later. This may mislead investors who are preparing for their financial futures,” Stearns said.
In addition, the panel was told, there are no pro forma reporting standards, meaning companies are free to prepare their books as they want, often in a way that paints a rosy picture of financial health.
Companies are required by law to file audited quarterly reports with the Securities and Exchange Commission, which can come months after the pro forma figures.
While the pro forma numbers might show a profit, the audited books might show a loss.
Many companies say pro forma results can offer a better picture of their underlying financial health by taking into account unique circumstances and industry dynamics.
But critics say companies can use them to hide undesirable news.
“Informed investors are fairly aware that some of these presentations are sort of ‘earnings before undesirable items,’ ” said James Leisenring of the independent Financial Accounting Standards Board.
Stearns did not call for an end to pro forma reporting, but said he wants guidelines established and wants companies to present both sets of books at the same time.
“I do appreciate that pro forma reporting should be flexible enough to be responsive to a particular company’s or industry’s dynamics, yet if every company comes up with its own definition, the utility of pro forma reporting is diminished for a small investor as he or she has no frame of reference to compare the pro forma results with,” the congressman said.
Standards could be created with the help of the FASB, which sets accounting and reporting guidelines, Stearns said.
Barry Rogstad, president of the American Business Conference, which represents mid-sized companies, told the panel that simultaneously releasing differing sets of numbers can be helpful to investors.
The Securities Industry Assn., a big Wall Street trade group, and the American Institute of Certified Public Accountants had no immediate comment on Stearns’ suggestions.
The SEC, Wall Street’s top regulator, also had no immediate comment. The SEC has made accounting a big priority over the last several years, forcing several companies to restate earnings to get their books in compliance with the law.
