SEC May Act on Pro Forma Reports

The Securities and Exchange Commission is sizing up possible enforcement actions against companies that mislead investors with bogus “pro forma” earnings reports, Chairman Harvey Pitt said Wednesday.

The agency is considering “cases in which we may be able to demonstrate that some companies took inappropriate liberties ... that created misleading impressions. We’re looking at some situations and, if they warrant it, we will take enforcement action,” he told reporters at a conference in New York.

It was the first signal from the top that the SEC is ready to crack heads on this issue, though Pitt declined to say how many companies are being examined.

While it has always been illegal for companies to deliberately misstate results, Pitt’s comments point to an escalation of the SEC’s publicly stated intent to focus on the much-used “pro forma” style of financial reporting.

Annual and quarterly corporate statements issued on a “pro forma” basis often skate over accounting rules, either to reveal good results obscured by outmoded conventions or, more frequently, to hide bad results by ignoring unpleasant facts.

Use of the pro forma approach has exploded recently. Forty-eight companies in the Standard & Poor’s 500 index this year issued pro forma results, up from just a handful as recently as 1998, according to earnings tracker Thomson Financial/First Call Corp.

“If there are instances of misleading pro forma disclosures, our staff will pounce on them. We have existing ample authority to take action against them,” Pitt said.