SEC to require 'pro forma' explanations
By Bloomberg News, 10/3/2002
boston.com
WASHINGTON - The Securities and Exchange Commission is preparing a rule to require companies that publish ''pro forma'' financial results to explain how they differ from earnings that follow US accounting standards.
Pro forma figures, which exclude costs such as merger expenses, grew popular in the 1990s as technology companies tried to cast their finances in a more favorable light. About 1,500 companies used pro forma results in press releases last year before filing official reports under generally accepted accounting principles, according to industry estimates.
The Sarbanes-Oxley Act requires companies that use pro forma results to show how they compare with earnings that follow US rules, and forbids companies from issuing press releases that omit ''material'' facts. The SEC plans to propose a rule this month to spell out the law, which some say doesn't go far enough.
''You have pro formas that on their face are flat-out misleading, and it occurs often enough to be troubling,'' said Alan Beller, SEC corporation finance director.
The law, which tightens oversight of US corporations, was a reaction to audit failures at Enron Corp., WorldCom Inc., and other companies. It required the SEC to appoint an accounting oversight panel, made company boards and auditors more independent, and increased corporate disclosure.
Under the planned SEC rule, if a company issues a press release saying its pro forma earnings will be $1 million and its official earnings are to be only $800,000, the company will have to disclose both figures and explain what expenses are excluded from the pro forma figures and why, Beller said.
Some accounting experts said the SEC should ban the use of pro forma releases entirely or require them to be issued at the same time as official quarterly reports.
This story ran on page E2 of the Boston Globe on 10/3/2002.
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