Thu. Jan 20th, 2022

The author is editor of The Dig and adjunct professor in the MBA program at the American University

Public companies around the world are addicted to reporting alternative financial performance metrics. Such numbers almost always tell a more positive story than the numbers they have to report.

It has helped push stock prices, separate market performance from financial reality and create unreal values ​​built for companies that report ongoing losses and questionable listings.

Companies say they use alternative metrics to create a more informative narrative and to provide figures that predict future performance better than standard accounting.

How do accounting standard setters respond to the complaint that companies need alternative numbers because standard accounting is not up to par?

The Board of Directors overseeing the International Financial Reporting Standards for Non-US Accounting has taken a direct approach and proposed to “management performance measures”And to require companies to disclose it in a single note. After a long period of public comment, the International Accounting Standards Board is considering these proposals.

For US accounts, the Financial Accounting Standards Board has no authority over alternative measures – it rests with the Securities and Exchange Commission. And it appears that the FASB has no interest in regulating measures that are not in line with its rules known as Generally Accepted Accounting Principles. This therefore calls for more studies to improve AARP.

Auditors say they have no responsibility for alternative figures in earnings releases or company listings that do not include their audited financial statements. Auditors usually do not check alternative numbers. But they like to help check out alternative metrics if companies want to pay extra. Just give them a ring.

However, researchers provide evidence that companies are creating alternative numbers, mostly to hide losses, report positive earnings growth and meet or beat analysts’ expectations.

A recent study Research company practices between 2010 and 2016 found that 11 percent of adjustments equal or exceed 100 percent of the absolute value of GAAP net income. Positive adjustments were more than negative adjustments 3-1.

Stock prices no longer move as much as companies merely achieve analyst estimates or make small earnings strokes. This may explain why research of 2018 has shown companies use alternative figures to produce quarterly earnings per share that will exceed analysts’ forecasts by 5 to 15 cents, rather than a cent or two.

The US Securities and Exchange Commission and the UK Financial Reporting Council have both sought to address the issue. But alternative numbers continued to multiply.

In October 2021, the FRC published its review of alternative performance measures based on a sample of 20 recent company annual reports. All offered custom numbers and some reported as many as 23 APMs. The APMs most commonly used are adjusted earnings before interest, tax, depreciation and amortization, adjusted profit before tax and adjusted operating profit.

In six cases, the adjustment losses turned into an adjusted gain. In 19 cases, the alternative measures were used to report higher gains, or lower adjusted losses, compared to real numbers.

Almost all S&P 500 companies use non-GAAP numbers to change their financial story. In May 2016, the SEC issued new guidelines to intensify the lethargy that has developed since it relaxed the rules in 2010. SEC staff used a bullying pulpit approach and even slapped some wrists. However, the steady stream of SEC personnel’s comments about the inappropriate use of non-standard statistics became a drop in 2017 under the Trump deregulating agenda.

The Trump SEC has taken civil action against a handful of companies. In one case, the security company ADT fined $ 100,000 for a March 2018 earnings release that used adjusted figures in the headings and highlights section, while the GAAP figures are quoted lower below. But U.S.-listed companies largely returned to their old tricks during the pandemic.

In May 2020, the Financial Times made observations of Ebitdac – earnings before interest, tax, depreciation, amortization a coronavirus. A white paper published in June 2020, found that more than 40 companies used similar Covid-free numbers.

I would like to see more discipline in the market, a return to fundamentals. But all around me investors tell me it’s too much of a drag. Trillions are traded based on unaudited earnings press releases filled with alternative numbers that should never be audited. Not enough investors want the genius back in the bottle.

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