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SEC warns on numbers
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December 4, 2001: 6:36 p.m. ET
Earnings data on 'pro form' basis should be viewed skeptically.
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NEW YORK (CNN/Money) - The nation's top securities regulator warned Tuesday that companies could be sued if they mislead investors by issuing confusing so-called "pro forma" financial results, weighing in on an issue of increasing concern to analysts and investors.
The Securities and Exchange Commission also warned investors to view such reports with "appropriate and healthy skepticism."
Companies discussing their quarterly profits usually report earnings from continuing operations, based on Generally Accepted Accounting Principles. Increasingly, however, companies have reported "pro forma" results, which have no standards and pick out certain aspects of a company's business and highlight others, usually to the company's benefit.
"Because 'pro forma' financial information by its very nature departs from traditional accounting conventions," the SEC said in a statement, "its use can make it hard for investors to compare an issuer's financial information with other reporting periods and with other companies."
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Read before you invest; understand before you commit.
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The SEC |
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The nation's securities regulator addressed an issue that has grown more troubling to analysts lately, as corporate earnings reports have become more and more muddled. Bond-rating agency Standard & Poor's recently said corporate earnings reports are "becoming harder to understand, more difficult to compare across companies and less useful to analysts and investors."
Officials at accounting firms PricewaterhouseCoopers and Arthur Andersen said they needed to study the SEC's statements before commenting.
Chuck Hill, director of research at First Call, which tracks Wall Street earnings forecasts, said the statement was a good beginning but that more work was needed, from companies, advisory bodies and regulators.
"It's a terrific start ... but I don't think it goes quite far enough," he told CNN/Money.com. "They have to get into the details a little more," he said, suggesting that companies need to spell out the impact of certain things on an after-tax, per-share basis, that are often excluded from results, such as the gain or loss on asset sales or investments.
The SEC warned companies that they could be running afoul of anti-fraud laws if their pro forma results mislead investors as to the true nature of their performance. It said a pro forma report could be informative when compared to a standard report, but only as long as companies are clear about what changes they've made to the standard report.
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"Investors cannot understand, much less compare, this pro forma financial information without any indication of the principles that underlie its presentation," the SEC said.
The SEC also warned companies to be careful about taking important facts out of pro forma reports.
"Statements about a company's financial results that are literally true nonetheless may be misleading if they omit material information," the SEC said.
To better comply with the SEC's standards, companies should follow the format for earnings press releases developed by Financial Executives International and the National Investors Relations Institute, the SEC said.
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The SEC also warned investors to closely read financial reports and to take pro forma earnings with a grain of salt.
"Read before you invest; understand before you commit," the SEC said. 
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