The panel members were winking while trying to be “discreet.”
And you may have needed an atlas to help you get the reference.
But a rudimentary knowledge of geography and a passing familiarity with some of the events that have precipitated the dot.com implosion of recent times left the reference and its context unmistakable.
Speaking Thursday (June 7) at an SEC Disclosure & Accounting Conference in New York, co-moderator Daniel V. Dooley, a PricewaterhouseCoopers partner, led into a panel discussion about the problems connected with pro-forma earnings announcements with reference to a “hypothetical” firm:
“For the sake of discretion, let’s just call it ‘Brazilian river.com,'” Dooley said. “And let’s just say that the ‘net’ in its net earnings stands for “not exactly true.”
Dooley, as part of a panel that included Lynn Turner, the SEC’s chief accountant, included in his none-too-veiled reference to Amazon.com, allusions to recent press coverage of the firm and the latest attempt of its top management to put a positive spin on earnings.
The day before the conference, the New York Times and other media outlets gave wide coverage to a pronouncement by Amazon CFO Warren Jensen that the firm would be profitable in 2002, based upon a “pro- forma” concept of operating profit that excludes interest payments on $2.1 billion in debt and costs related to acquisitions, layoffs, and stock-option grants.
This latest round of criticism comes in the wake of an April announcement at a Financial Executives International conference in New York that both the FEI and the National Investor Relations Institute were issuing “best practices” guidelines for press releases mandating that earnings press releases containing pro-forma results, or statements of earnings excluding certain items or broken down by business segments, also contain a reconciliation to GAAP.
Industry wags have since taken to referring to the initiative as “The Amazon guidelines.”
“What we’re saying here is that ‘we are profitable after we exclude a slew of numbers,’ “or ‘we are profitable after we exclude all our expenses,'” said Dooley at the latest conference, referring to the “spin” the fake firm named after the Brazilian river has been giving to its earnings announcements”
“They seem to have a regular periodicity to their non-recurrence,” he said likening the dot-com’s earnings releases to explanations his wife would repeatedly give him with each annual reconciliation of his family’s budget.
Another participant, Alan Levinson, a senior partner at Washington, D.C.-based Fulbright & Jaworski, and a former director of the SEC’s division of corporation finance, predicted that patience on the part of regulators may soon be coming to an end.
“I’m not part of the SEC enforcement division, but I can assure you today that you are going to see enforcement actions,” he told the audience of lawyers, accountants, and senior financial executives assembled to hear the panel, referring to alleged abuses of pro-forma earnings.
The SEC’s Turner, for his part, echoed much of this criticism, and noted that analysts have played a “major role” in disseminating “hype and spin” over “the last two or three years.”
“I tell investors if you see pro-forma numbers you should raise a red flag and read the 10-K,” he said.
“Not all but most, analysts are potato heads,” said Dooley, criticizing the tendency of many to disregard costs such as interest, taxes, depreciation, and amortization when making estimates of profitability.
“The fact that you get to EBIDTA is a slippery slope,” he said. “It’s going to get to the point where we only report revenues because the other numbers are not profitable.”