SEC Warns Against Skewed Fiscal Reports
The Securities and Exchange Commission on Tuesday threatened to sue companies that mislead investors with “pro forma” accounting, which typically makes companies’ earnings look better by excluding certain expenses.
“The antifraud provisions of the federal securities laws apply to a company issuing pro forma financial information,” the SEC said in “cautionary advice” posted on the agency’s Web site.
The SEC also warned investors to view these widely used accounting reports with suspicion. Pro forma reports “might create a confusing or misleading impression, and should be viewed with appropriate and healthy skepticism,” the SEC said.
The agency’s message followed the bankruptcy filing of Enron Corp. on Sunday. Enron collapsed after warning that its previously reported financial results were flawed. That has brought heat on the independent auditors who approved the company’s financial reports, and has added to concerns that U.S. corporate financial reporting may be riddled with inaccuracies.
“I don’t think the SEC had a choice in trying to put some teeth in getting companies to observe best accounting practices,” said Dean Krogman of the Financial Executives Institute, a group of corporate fiscal officers. “They’ve been getting pressure from investors.”
Pro forma earnings, which are often highlighted in news releases weeks before official earnings are filed, have been used in recent years by hundreds of companies. This type of accounting excludes costs associated with mergers and acquisitions, noncash compensation, in-process research and development and goodwill amortization.
The SEC warning to companies cited some examples of pro forma accounting--such as the use of “earnings before interest, taxes, depreciation and amortization,” or EBITDA--that could prove fraudulent in certain circumstances. It said the SEC would be concerned if companies were to use EBITDA and other figures that address “a limited feature of a company’s overall financial results” without clearly disclosing the basis of its accounting.
The SEC also said company statements that omit “material” information in, say, recasting a loss as if it were a profit, also could be considered misleading unless the company offered a clear explanation.
SEC Chairman Harvey Pitt said earlier this month that the federal agency may propose rules to limit companies’ use of pro forma accounting, and is investigating some cases of possibly misleading disclosures.
