SEC Cracking Down on Misleading “Shocking” Corporate Accounting

SEC Cracking Down on Misleading “Shocking” Corporate Accounting

SEC Cracking Down on Misleading “Shocking” Corporate Accounting


SEC’s chief accountant for corporate sending message to companies that aggressively engage in misleading adjusted earnings measures.

Mark Kronforst, chief accountant of the SEC’s corporation finance division, warned that the SEC is sending a message to companies that excessively engage in misleading accounting. That message comes in the form of an uptick in SEC comment letters, meaning official public correspondence between the SEC and US public companies. Thus, giving companies the opportunity to self-correct the misuse internally.

This practice is not new, as some US public companies adjust their GAAP earnings to exclude certain items.

The SEC currently allows for this as long as adjusted earnings are shown alongside and reconciled to GAAP. Sometimes with good reason to show a company’s results of operations excluding non-recurring items.

The problem is that the practice of excluding bad stuff is getting shocking in some cases according to the SEC.

We are aware that the divergence between GAAP and adjusted earnings  often widens during recessions because companies tend to be more liberal in their exclusions to make earnings look rosy.

Note: the energy sector is in a recession and making adjustments, some may be inappropriate according to the SEC.

Overall, it should not matter how companies adjust their earnings, as long as all the GAAP data are readily available. The problem is that the average retail participant may be fooled by the rosier adjusted picture.

This is true in light of the fact that the major data providers of public company earnings tend to compile consensus earnings forecasts based on adjusted earnings. Such forecasts often are given greater emphasis than GAAP earnings in financial press reports.

So now, SEC officials are sending a message that they’re looking out for the less savvy retail participant.

Savvy analysts and professional investors are attuned to adjusted earnings. And they make valuation determinations based on their own interpretation of results. .

Tracking the SEC’s correspondences related to non-GAAP matters could be challenging their web data service is somewhat archaic, and more often than not ‘busy.”

But, PwC has done some work in its comment letter trend reports.

Among the sectors covered by PwC’s 2015 reports are Energy and Technology, 2 S&P sectors that are prone to the overuse of non-GAAP measures. Energy is doing so due of the dive in Crude Oil prices since June 2014. And, many tech companies are in habit of inflating their adjusted operating profits by excluding stock-based compensation.

The SEC complaints focus on subjective matters, like when companies emphasize non-GAAP measures more than GAAP ones, or when non-GAAP measures are not reconciled back to what is considered to be the most directly comparable GAAP measure, or when non-GAAP measures are presented without a substantial reason why they help the financial statement user to better understand results.

And do it goes…

Monday, the US major stock market indexes finished at: DJIA -8.01 at 17492.93, NAS Comp -3.78 at 4765.78, S&P 500-4.28 at 2048.04

Volume: Trade was lighter than average with about 800-M/shares exchanged on the NYSE

HeffX-LTN Analysis for DIA:  Overall Short Intermediate Long
Neutral (-0.01) Neutral (0.23) Bearish (-0.35) Neutral (0.08)
HeffX-LTN Analysis for SPY:  Overall Short Intermediate Long
Neutral (-0.06) Neutral (-0.06) Neutral (-0.17) Neutral (0.06)
HeffX-LTN Analysis for QQQ:  Overall Short Intermediate Long
Neutral (-0.22) Neutral (-0.13) Bearish (-0.25) Bearish (-0.28)
HeffX-LTN Analysis VXX:  Overall Short Intermediate Long
Bearish (-0.32) Neutral (-0.14) Very Bearish (-0.50) Bearish (-0.33)

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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