The Enron fiasco has clearly raised the awareness of creative accounting maneuvers such as off-balance-sheet financing and special purpose entities (SPEs). But the growing corporate reliance on pro forma earnings may well be the next accounting issue to blossom into a full-fledged controversy.
In fact, just before the entire Enron scandal bubbled to the current frenzy, SEC commissioner Harvey Pitt seemed determined to get to the bottom of the pro forma problem. In October, just three months after taking office, Pitt ripped the growing practice of issuing pro forma results. At the time, he also called for a revamping of the financial reporting system. And as CFO.com reported last week, the SEC on Wednesday issued it’s first pro forma cease and desist order. The recipient? None other than Donald Trump, CEO of Trump Hotels & Casino Resorts.
But Chairman Pitt may have his hands full tackling the pro forma issue. In an exclusive CFO.com/KPMG survey released in November, 82 percent of 196 finance managers said their companies report some kind of non-GAAP (that is, pro forma) earnings in press releases.
And now comes further proof that pro forma results are real popular among the numeric keypad set. According to a recent survey conducted by the National Investor Relations Institute (NIRI), 133 of the 233 companies sampled, or 57 percent, reported pro forma information with prominence (or at least equal importance to GAAP measures if GAAP results were shown). Of the 133 companies reporting pro forma results, only four did not include GAAP earnings per share results.
What’s more, the bigger the company, the more likely they are to have used pro forma results. Among publicly traded corporations with a market capitalization exceeding $5 billion, more than 75 percent said they use this non-GAAP reporting method. Nearly 80 percent of the respondents at companies with market caps between $1.5 billion and $5 billion said they use pro forma results. Only around 50 percent of companies with a market value of less than $500 million said they use pro forma results.
Put another way, of the 90 companies surveyed with market caps greater than $1.5 billion, 78 percent reported the most recent quarterly results using pro forma measures; 22 percent did not.
If you measure by sales, the pattern is the same. The larger the turnover, the more likely a company issued pro forma measures. Of the 23 companies with sales exceeding $2 billion, 74 percent reported pro forma results. But, only 51 percent of the companies with sales less than $100 million reported pro forma measures.
Auditor Independence Bill?
The folks on Capitol Hill are certainly turning up the heat on Enron and Andersen, the world’s largest accounting firm. Both companies are being investigated by no fewer than 10 Congressional committees.
Now, in an ominous development for the Big Five accountancies, California Democratic Sen. Barbara Boxer said she is planning to introduce a bill later this week that would prevent an auditor from providing consulting services to the same client, according to published reports.
“The American people have a right to expect that the firms that audit the companies they invest in are free from conflicts of interest,” Boxer said in a statement. “These conflicts have led to the kind of hide-the-debt shell game that took place at Enron.”
As you recall, auditor independence was a major priority of the prior SEC administration, led by chairman Arthur Levitt. Later this week, CFO.com will look at how the Enron controversy is forcing the Bush administration to rethink its pro-business approach to accounting regulations.
KPMG CEO to Retire
With little fanfare, KPMG CEO Stephen Butler said he will retire in November. A successor is not expected to be named until this summer, according to The Wall Street Journal, citing a KPMG spokesman.
Butler, 55, who plans to step down when his six-year term is completed, actually made his announcement to the firm back in the fall, but the company did not make a formal announcement. During his tenure, Butler oversaw the spinoff of the KPMG Consulting unit.
He was also at the helm during several KPMG accounting flaps, including the controversial audits of Xerox and Lernout & Hauspie Speech Products.