In December, the Securities and Exchange Commission sent a shot across the bow of Corporate America when it issued a formal warning regarding the release of misleading pro forma numbers. “Expect enforcement action to follow in short order,” says Christian Bartholomew, a former senior trial counsel for the SEC and a partner in the Miami office of national law firm Morgan Lewis & Bockius. Bartholomew says the SEC will likely bring legal action against several companies at one time, all focused on pro forma accounting practices that allegedly hide material information about the financial health of a company from investors. The time frame: the next 3 to 10 months.
Bartholomew wouldn’t speculate about which companies are likely SEC targets, but he notes that the cases will serve as platforms to work out more detailed pro forma guidelines. “The SEC doesn’t think pro forma accounting is inherently bad or good; the commission just wants companies to be clear on why and how they use it,” he adds.
The SEC’s warning follows the accounting-related meltdown at Houston-based Enron Corp., the biggest corporate failure in history.