NEW YORK - March 28 is G-Day for "pro forma."
The bubble metric, which often stripped out nonrecurring charges or revenue, isn't completely going away. But today, when the U.S. Securities and Exchange Commission's Regulation G goes into effect, reporting companies will be required to highlight Generally Accepted Accounting Principal numbers alongside any non-GAAP numbers.
Over the past 18 months, investors and regulators have started to demand GAAP numbers and a traceable reconciliation between pro forma and GAAP figures. And most companies have complied. But now reconciliation is required and any failure to do so will bring the wrath of an SEC empowered by Sarbanes-Oxley.
Regardless of whether the numbers appear on a press release, in a presentation or on a conference call, a company must show the audience how to get from one number to the other.
"This day marks a significant event in that it is a nonevent," says Steve Schultz, director of governance programs at Shareholder.com, a privately held investor relations services firm in Maynard, Mass. Schultz says most companies had already begun reconciling non-GAAP numbers before the deadline. He says the behavior toward regulation is changing for many clients: "They are doing things differently."
Even Tyco International (nyse: TYC - news - people ), with its self-defined "free cash flow from operations" figure, has been turning in earnings releases that show GAAP and non-GAAP reconciliation side by side.
But, cautions Jack Ciesielski, "the act of monitoring behavior changes behavior." Ciesielski, author of newsletter The Analyst's Accounting Observer, thinks companies are more worried about how investors will receive deeper disclosure on off-balance sheet arrangements and contractual obligations.
For companies with fiscal years ending after June 15, details of off-balance sheet arrangements (special-purpose or variable-interest entities, derivative hedges and more) must be separately discussed in quarterly SEC filings. After the first wave of Enron (otc: ENRNQ - news - people ) special-purpose entities were exposed, companies from General Electric (nyse: GE - news - people ) to Dell Computer (nasdaq: DELL - news - people ) began giving more information on financial entities not consolidated within their own statements.
"Once Enron hit, everyone said 'We don't have any' or 'We have them and here's the business purpose,'" says David Larcker, an accounting professor at University of Pennsylvania's Wharton School. Now, going even further, the SEC is requiring companies to not just explicitly expose their special-purpose entities, but also to detail ways in which those entities could have a material financial impact on the companies' results.
As if investors don't already have enough new things to consider when picking a stock--Is there a financial expert on the audit committee? When will they expense options?--now investors will be supplied with "if, thens" for items they never knew existed.
Shareholders of Plano, Texas-based Electronic Data Systems (nyse: EDS - news - people ), no doubt, would have been up in arms had they known of the attempted profiteering on the company's own stock gains. The speculation backfired on the computer services firm and it reportedly took a $100 million hit in 2002 due to poor hedging.
Greg Fletcher, director of financial accounting and reporting for the Association of Financial Professionals (AFP), believes that some of the new rules being considered by the SEC or the Financial Accounting Standards Board could ultimately be detrimental. For example, the SEC is considering requiring firms to discuss accounting estimates in regulatory filings. For Fletcher, that notion--and the requirement that companies disclose certain material financial events in less time--opens a bit too much of the private black box that keeps business competitive.
"Some of that information is proprietary," says Fletcher. "It could serve to cloud the management's discussion and analysis as opposed to making it more transparent."
In a letter to the SEC last summer, AFP, a Bethesda, Md.-based organization of more the 14,000 financial executives, recommended that the commission limit disclosure to a qualitative discussion of certain accounting principles. AFP's worry was that companies might end up having to "quantify hypothetical effects of unknown changes in variables that affect the estimate."
That sounds more like the voodoo pulled by outsized estimates in the 1990s than a remedy for such excesses.
Still, the entire market community--from regulators, to bankers, to investors--has a duty of its own to recognize the intentions of recent rulemaking: to clear out all the companies like HealthSouth (nyse: HRC - news - people ) so that investors can trust the market again.
The first milestone event in the Sarbanes-Oxley era came in late August 2002 when chief executives and chief financial officers were required to sign off on financial statements. Today's event has not received nearly as much attention from the public. Nor should it: Companies are slowly getting the message to do what's right, or else.
Songs I Luv
( NEWER )
( NEW )
