The death of pro forma results has been greatly exaggerated.
Despite the stern mandates of Sarbanes-Oxley Act, and the widespread use of generally accepted accounting principles (GAAP), the use of pro-forma reporting practices are not fading, as many experts predicted. Indeed, the practice of removing certain items to make corporate results look better is still in vogue for a handful of companies, says a report in USA Today.
More than two dozen major companies continue to serve up pro forma versions of their financials when they report financial results, says the report, including old tech/Internet favorites, such as Cisco, eBay, and Qualcomm.
Certainly, the practice is not illegal, it's just more opaque than transparency advocates hoped for. To be sure, companies that use pro-forma reporting practices must simultaneously report results using GAAP, and then explain the difference between the two sets of financials. What's more, in some cases, pro forma reporting makes sense. For instance, when a CFO wants to show what earnings would look like if a one-time charged was removed.
Nevertheless, with good corporate governance and financial transparency a corporate priority, it's still a bit shocking to learn that a number of companies are offering pro forma results.
The trend is far from an epidemic, however. According to Thomson First Call research, just 28 of the 444 companies in the Standard & Poor's 500 that have reported second-quarter results subtracted anything other than benign one-time items. This is down from 43 in the second quarter of 2001, and about 70 in 2000 at the height of the tech and Internet bubble.
"A majority of companies get it, but there are still a few that haven't changed a bit," Joe Cooper, research analyst at First Call, told USA Today.
The paper points out that eBay's pro forma earnings, for example, were 10 percent higher than the official earnings; while Cisco's profits were 12 percent better than the official results.
Most Top Executives Still See Recession
Is there light at the end of the recession tunnel? Some corporate profits are climbing, one measure of the unemployment rate recently fell, and the stock market indices are up way above their lows.
But, a recent survey found that most executives at the largest companies are still pessimistic about economic prospects. According to global search firm Christian & Timbers, 235 executives at Fortune 1000 companies, or 82 percent, do not feel that the recession is over.
Participants were asked to respond to the following: "The National Bureau of Economic Research said that the US economic recession that began in March 2001 ended eight months later. To you, does it feel like the recession is over?"
According to Jeff Christian, chairman and CEO of the search firm, "Our interviews with CEOs and senior executives show that they are still reeling from the effects of layoffs, downsizing, sluggish sales and increased shareholder pressure. Even with positive market indicators and some encouraging profit gains in the hard-hit technology sector, they remain cautious."
Another reason for the uncertainty is the very different economic structure that American business faces as it comes out of this recession, he added. "Many industries have been forced to move manufacturing out of the country to cut costs," he said. "But offshore manufacturing and outsourcing do not produce new jobs for Americans, or increase the buying power of the workforce."
Trust Busters
Given the rash of accounting and other corporate scandals over the past two years, it's not surprising that investors have lost faith in the ability of executives and board members to look after stockholder interests.
What is surprising, however, is that a full year after the passage of the Sarbanes-Oxley Act -- the law passed to curb corporate malfeasance -- most executives don't place more confidence in their boards to do the right thing.
To be sure, 40 percent of 133 public company executives and employees polled by Clark Consulting said that the trust level of board members to protect shareholders' interests has not changed compared with two years ago. What's more, another 24 percent reported that board member trust has declined as well.
Just about a third of the executives -- 34 percent -- claim they do have more trust in board members than two years ago.
"Trust is a hard thing to win back," said Tom Wamberg, chairman and CEO of Clark Consulting. "Public trust of boards is tied to corporate performance. In the past quarter we are starting to see improving results, which will help regain trust."
MetLife Restates Results
Officials at MetLife Inc. say the company will restate second quarter earnings by $31 million after-tax. The announcement comes one week after the top brass reported company results.
Executives at the insurance giant noted that the adjustment results from certain improperly deferred expenses at its affiliate, New England Financial, which is part of MetLife's Individual Business segment. The $31 million charge resulted in a reduction to net income and operating earnings in the Traditional Life and Variable & Universal Life product lines within the Individual Business segment.
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