Any company we might know?:"SEC to Charge Company With Misleading `Pro Formas'
Washington, Dec. 18 (Bloomberg) -- The Securities and
Exchange Commission will soon file civil charges against a company
for misleading investors by using pro forma accounting, SEC
Chairman Harvey Pitt said.
``I suspect, given what we've seen, that there will be some
enforcement activity,'' he said in an interview last Tuesday.
``Meaning a real case.'' Pitt, who has headed the federal agency
since August, declined to name the company to be charged.
The case will be the first filed by the SEC over companies'
use of figures that typically make earnings look better by
excluding some costs, former SEC officials said.
``This case will send a message to companies and accountants
to cut back on some of the games they've been playing, and it
shows that Harvey Pitt is serious about the quality of financial
reporting,'' said former SEC General Counsel Harvey Goldschmid.
The reliability and accuracy of company financial reports are
being questioned by Congress after Enron Corp.'s collapse and the
apparent failure of its auditor, Arthur Andersen LLP, to detect
financial irregularities. The Houston-based energy trader, which
filed the biggest Chapter 11 bankruptcy ever, admitted overstating
earnings by $586 million over five years.
Cisco Systems Inc. and Amazon.com Inc. are among hundreds of
technology companies that have issued pro forma earnings
highlighting what they call their core performance. These reports,
prepared differently than required by U.S. accounting rules, are
sometimes issued in press releases that can cause the stock to
rise and are followed weeks later by official results that can
prompt shares to fall.
Warning Investors
The SEC's enforcement case will give teeth to its threat last
week to file civil fraud charges against companies that mislead
investors with pro forma earnings, said Goldschmid, now a Columbia
University law professor. The SEC also warned investors to view
pro forma reports with suspicion.
Pro forma figures can be legal as long as they don't mislead
investors. Possibly illegal pro forma results would be those that
omit important information or address ``a limited feature'' of a
company's results without disclosing the underlying financial
basis, the SEC said last week.
``If reported earnings under generally accepted accounting
principles are presented side by side with pro formas, and there's
a reconciliation, and it's clear the investor can see the
difference between them, I think that's okay,'' said former SEC
Chief Accountant Walter Schuetze.
Pitt, 56, has said the SEC is investigating a number of cases
of pro forma accounting, which can exclude costs involving
mergers, non-cash compensation and in-process research and
development.
Steering Clear
The SEC's enforcement case will be the first alleging
misleading use of pro forma results, said Goldschmid and former
SEC Chief Accountant Lynn Turner. Other companies that have issued
pro forma earnings include Procter & Gamble Co., SCI Systems Inc.
and Yahoo! Inc.
``The case will send a message that companies are probably
best off if they steer clear of pro forma earnings entirely,''
said Turner, now a Colorado State University accounting professor.
Schuetze said, though, that pro forma earnings still ``have a
place,'' and many companies agree.
Seattle-based Amazon, the biggest Internet retailer, releases
its pro forma results at the same time it files its earnings under
generally accepted accounting principles, a company spokesman
said.
``We have made a consistent, longstanding effort to present
pro formas as an additional analytical tool that accompanies our
GAAP results,'' said Amazon spokesman Bill Curry. ``We believe pro
formas provide the best insight into the health of the business.''
Facing Criticism
Pitt, a Republican, has said the SEC also may propose rules
to limit companies' use of pro forma accounting. The SEC chairman,
who represented large accounting firms when he was a lawyer in the
private sector, is continuing the focus on pro forma accounting
begun by his predecessor, Arthur Levitt.
Pitt was criticized recently by Representative John Dingell
and in Washington Post and Los Angeles Times editorials for
striking a conciliatory tone with accountants. The SEC chairman
told Dingell, a Michigan Democrat, that Levitt's more
confrontational approach ``has not yielded the kinds of positive
results that you and I wish for the benefit of investors.''
--Neil Roland in Washington (202) 624-1868 or
nroland@bloomberg.net/ba
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