SEC Wants Pro Forma Results Spelled Out

The Securities and Exchange Commission is preparing a rule to require companies that publish pro forma financial results to explain how those numbers differ from earnings that follow U.S. accounting standards.

Pro forma figures, which exclude costs such as merger charges, became popular in the 1990s as many otherwise marginally profitable or unprofitable technology firms tried to make their finances appear more favorable.

About 1,500 companies used pro forma results in news releases last year before filing official reports under generally accepted accounting principles, according to industry estimates.

The Sarbanes-Oxley corporate reform law that President Bush signed in July requires companies that use pro forma results to show how they compare with earnings that follow U.S. rules, and forbids companies from issuing news releases that omit “material” facts.

The SEC plans to propose a rule this month to spell out the requirements of the law.

“You have pro formas that on their face are flat-out misleading, and it occurs often enough to be troubling,” SEC Corporation Finance Director Alan Beller said. “Reconciling the figures is a pretty clear way of dealing with the problem.”

Some executives say pro forma earnings give a better picture of a company’s true growth rate within its basic business. Although some firms don’t explain their pro forma numbers, hundreds of others already relate in their earnings news releases what their numbers are under U.S. accounting rules as well as pro forma results.

In a survey of 133 companies, about 10% weren’t complying with industry guidelines for reconciling pro forma numbers with official figures, the National Investor Relations Institute has said.

“Ten percent is higher than what we should accept,” Beller said.