The SEC, led by chairman Harvey Pitt, once again emphasized its determination to crack down on pro forma earnings abuses.
This week, the regulatory body issued what it calls “cautionary advice” that companies and their advisors should consider when releasing pro forma financial information. In it, the commission warned: “The antifraud provisions of the federal securities laws apply to a company issuing ‘pro forma’ financial information.”
The SEC also issued an investor alert that describes how pro forma financials should be analyzed, including a reminder that they should be viewed with appropriate and healthy skepticism.
“We are concerned that ‘pro forma’ financial information, under certain circumstances, can mislead investors if it obscures GAAP results,” the SEC noted on its Web site. “Because this ‘pro forma’ financial information by its very nature departs from traditional accounting conventions, its use can make it hard for investors to compare an issuer’s financial information with other reporting periods and with other companies.”
In the same release, the SEC also made these points:
- A presentation of financial results that is addressed to a limited feature of a company’s overall financial results (for example, earnings before interest, taxes, depreciation, and amortization), or that sets forth calculations of financial results on a basis other than GAAP, raises particular concerns. “Such a statement misleads investors when the company does not clearly disclose the basis of its presentation. Investors cannot understand, much less compare, this ‘pro forma’ financial information without any indication of the principles that underlie its presentation,” it added.
- Companies must pay attention to the materiality of the information that is omitted from a ‘pro forma’ presentation. Statements about a company’s financial results that are literally true nonetheless may be misleading if they omit material information. “For example, investors are likely to be deceived if a company uses a ‘pro forma’ presentation to recast a loss as if it were a profit, or to obscure a material result of GAAP financial statements, without clear and comprehensible explanations of the nature and size of the omissions,” it added.