In a recent wire service interview, Securities and Exchange Commission chairman Harvey Pitt said the SEC has “an obligation to study” the use of pro forma earnings in corporate reports and press releases. What Chairman Pitt and the SEC are likely to learn when they commence their studying is: Not only do the majority of corporate finance managers issue pro forma results — most see nothing wrong with it.
At least, that’s the conclusion to be drawn from an exclusive CFO.com/KPMG survey conducted this week. In the survey of some 196 finance managers, 82 percent of respondants said their companies report some kind of non-GAAP (that is, pro forma) earnings in press releases. The poll, which was conducted at the Financial Executives International conference held in New York on Monday, also showed that the lion’s share of corporate filers — 88 percent — believe it is appropriate to include nonfinancial measurements in growth trends.
When asked why they issue pro forma results, the respondents were divided. Around 45 percent said non-GAAP results help convey their companies’ true financial performance. And 27 percent said they released pro forma results to meet the demands of analysts. But intriguingly, one quarter of the finance executives admitted that pro forma earnings help “put the best spin on the results.”
This is not to say that finance executives don’t think some work needs to be done on how pro forma results are presented. Most of the respondents (93 percent) believe a company should be required to reconcile non-GAAP financial measures and GAAP operating results in an earnings press release. What’s interesting, however, is that finance managers apparently would much rather have the SEC providing guidance on pro forma numbers, not FASB. Fully 65 percent of the respondents indicated the commission should take a more formal role in the earnings release process. But when asked if FASB should address pro forma earnings computation and reporting issues in their project on performance reporting, well over half the respondents said no.