BarryD -
This is a tough topic, especially after Enron and Global Crossing
debacles. Most of these articles argue that one should look at GAAP
earnings first, then look at the pro forma information as "added
information." And many conservative analysts leaven that with "watch
the cash flow statements just as carefully."
This article talks about the widening definition of pro forma
reporting, which used to be primarily used to provide comparable
quarterly income statements by leaving out "one-time" charges. It
notes a Wall Street Journal study that says pro forma statements have
been used since Sept. 11, 2001 to inflate profitability. (Some 41% of
the companies reporting a loss in Nov/Dec, 2001 attributed it to the
effects of terrorism.)
The CPA Journal
"The Dangers of Pro Forma Reporting" (February, 2003)
http://www.nysscpa.org/cpajournal/2003/0203/dept/d026403.htm
This article gives an investor relations managers' perspectives on the
increased information being requested under Sarbanes-Oxley, SEC and
National Investor Relations Institute (NIRI) guidelines:
IrontheNet.com
"Mondo quarterlies" (February, 2003)
The accounting firm of Hale and Dorr put together an interesting
8-page guide to "best practices" in reporting pro forma and GAAP
results. It was published after the Securities and Exchange
Commission provided new published guidance for companies on pro forma
issues early that month:
Hale and Dorr, LLP
"Corporate Advisor" (December, 2001)
http://www.haledorr.com/db30/cgi-bin/pubs/CorpAdv_12_01.pdf
You may also find the Alexander Hamilton awards helpful. They are
made by Treasury and Risk Management Magazine, for the best investor
relations support and in 2003 included specific examples of companies
which were successful in clarifying the conflict between pro forma and
GAAP accounting:
Treasury & Risk Management
"Alexander Hamilton Best Practices Awards" (October, 2002)
http://www.treasuryandriskseminars.com/investrel02.html
This is an extremely academic study that looks at earnings predictions
and where there are differences. Though it comes to no conclusions on
the pro forma vs. GAAP issue, it includes some interesting information
on why earnings don't meet expectations. Also, it has a very long
list of academic papers (see page 51) - several of which cover the
issues of pro forma earnings specifically:
University of Michigan - Prof. Reuven Lehavy publications
"Differences in Commercial Database Reported Earnings" (June, 2002)
http://webuser.bus.umich.edu/rlehavy/ReportedEarningsRAST6-25-02.pdf
This presentation was given by three business professors in February,
2003 at the 3rd Annual Utah Winter Accounting Conference.
Unfortunately, the link to the paper is no longer available online:
"'Spin' in Earnings Press Releases: The Determinants of Emphasis of
Pro Forma versus GAAP Performance" by Bob Bowen ( University of
Washington), Angela Davis (Washington University) and Dawn Matsumoto
(University of Washington )
The Google search strategy used here:
"pro forma vs. GAAP" returns about 20 results
"pro forma versus GAAP" returns about 20 also, but they're quite
different and are generally better quality
"Bob Bowen" + "University of Washington" was an attempt to find the
February paper from the Utah Winter Accounting Conference elsewhere on
the web. Though faculty members often link published articles to
their C.V, this search attempt failed.
I also did a search of some private databases, such as Infotrac and
Expanded Academic ASAP. Your local library may have these articles
available:
Barron's
"Market Theorists Insist that All Relevant Information is Priced
Efficiently into Stocks" (Feb. 13, 2003)
Barron's
"Pro Forma No More" (Jan. 20, 2003) - an article on the impact of
Sarbanes-Oxley on pro forma reporting
Oil. Gas & Energy Quarterly
"Reporting non-GAAP earnings in the oil and gas industry: a
preliminary investigation and analysis" (September, 2002)
Two excellent resources for information on the topic, including
research on how pro forma and GAAP earnings are being reconciled are a
pair of industry associations. The latter routinely surveys IR
managers on how they're presenting accounting information - and the
two have guidelines for GAAP/pro forma reporting here:
"FEI/NIRI Earnings Press Release Guidelines" (2001)
http://www.fei.org/news/FEI-NIRI-EPRGuidelines-4-26-2001.cfm
Financial Executives International (FEI)
http://www.fei.org/
National Investor Relations Institute (NIRI)
http://www.niri.org/
Don't forget that you can use Google's site search capabilities on
either of these last two sites (from Advanced Search or from the
Google toolbar) to find specific information.
Best regards,
Omnivorous-GA |
