WALL STREET JOURNAL.
SEC Probes Whether Companies Are Misusing Adjusted Earnings
SEC’s inquiries focusing on if companies use adjusted earnings too
A primary focus of the SEC’s latest inquiries is whether
companies have featured customized measures too prominently in
earnings releases and other disclosures.
PHOTO: STEPHEN VOSS FOR THE WALL STREET JOURNAL
Updated Oct. 27, 2016 10:23
The Securities and
Exchange Commission’s enforcement division has informed some companies
in recent weeks that it is examining their use of adjusted earnings
measures, according to people familiar with the matter.
The inquiries are the
latest in a series of steps by the agency this year to
discourage use of these metrics,
which critics contend allow companies to flatter their financial
performance. The SEC’s focus on this issue has occurred as the
difference between these adjusted measures and results under generally
accepted accounting principles showed their widest difference last
year since 2008.
A primary focus of the
SEC’s latest inquiries is whether companies have featured customized
measures too prominently in earnings releases and other disclosures,
the people familiar with the matter said. It isn’t known how many
companies the SEC is targeting, or when or whether it might take any
“The SEC has made it clear
it is serious about trying to put at least some of the non-GAAP genie
back in the bottle,” said David Trainer, chief executives of New
Constructs, an investment-research firm. “Non-GAAP” refers to results
provided by companies that don’t conform to generally accepted
The SEC declined to
comment on the latest inquiries.
Companies that use non-GAAP
metrics contend they provide a truer picture of performance, often by
stripping out noncash and nonrecurring items. But their growing
prominence has stoked memories of similar usage during the dot-com
In May, the commission
issued new guidelines on non-GAAP
use, and there have been a series of sometimes-pointed comment letters
from the agency to companies about the practice.
In the May guidance, the
SEC detailed some ways it might find use of non-GAAP numbers
objectionable—tailoring numbers to remove costs that are important to
measuring the company’s performance, for instance, or spotlighting
non-GAAP measures so much they obscure the official GAAP numbers.
The commission suggested
companies should use their next earnings reports to “self-correct” any
problems, and many did so: More than a quarter of S&P 500 companies
reporting earnings in July and August shifted to giving GAAP numbers
the greatest prominence in their earnings releases instead of non-GAAP
according to an analysis from
consulting firm Audit Analytics conducted for The Wall Street Journal.
That hasn’t completely
alleviated the SEC’s concerns, however. Since the May guidance, the
SEC’s corporation-finance division has sent more than 100 comment
letters to companies questioning whether their non-GAAP disclosures
comply with it.
The Securities and Exchange Commission in May issued guidelines
on use of non-GAAP measures and is trying to discourage the
Photo: Andrew Harnik/Associated Press
The latest SEC enforcement
inquiries appear to be separate from the May guidance because they
pertain to companies’ disclosures from before it was issued, one of
the people with knowledge of the situation said. “I think the
enforcement people think (the companies) have violated longstanding
rules,” this person said.
Even after the May
guidance, some companies kept using non-GAAP metrics in ways the SEC
had cautioned against, though some have since said they plan to
change. “There are some judgment calls that need to be made,” said
Matthew E. Kaplan, a securities attorney at law firm Debevoise &
Tesla Motors Inc., for instance,
reported adjusted non-GAAP revenue of $1.6 billion when it
announced second-quarter earnings
in August. In doing so, it added back nearly $300 million in deferred
revenue the company collects up front but doesn’t book until future
quarters. The SEC said specifically in its May guidance that companies
shouldn’t report non-GAAP revenue that way.
Tesla has since said it
would stop reporting non-GAAP revenue in that fashion; it didn’t
include non-GAAP revenues in its
third-quarter earnings announcement
Wednesday. A Tesla spokeswoman said the company had no further
Syneron Medical Ltd. touted its
second-quarter non-GAAP earnings of 9 cents a share in the headline of
its August press release, and
didn’t disclose until much further down in the release that its GAAP
net income was only 3 cents a share.
The SEC had said in its
guidance that if companies use non-GAAP measures in earnings-release
headlines, they must include the comparable GAAP measure as well. Hugo
Goldman, Syneron’s chief financial officer, said the company wasn’t
under SEC investigation and was “changing the format of our non-GAAP
reporting to comply with SEC rules and the recent guidance.”
Michael Rapoport at