SEC To Wall Street: No More Non-GAAP Accounting... For Real This Time
The SEC says it's finally cracking down on non-GAAP accounting. Wall Street companies have been using non-GAAP accounting since the 1990s. Now, only a couple of decades after it appeared, the SEC is springing into action to nip this non-GAAP fad in the bud.
GAAP is an acronym for “generally accepted accounting principles,” and non-GAAP earnings are a form of “alternative” earnings measures that a company feels better-represents its performance than GAAP measures do.
Unfortunately, companies can use non-GAAP metrics to mislead investors.
“The point is, now the company has created a measure that no longer reflects its business model,” SEC accountant Mark Kronforst explains.
“We’re going to take exception to that practice.”
One recent example of the type of difference that non-GAAP accounting can make is Alcoa Inc (NYSE: AA)’s earnings. The company reported a GAAP net income loss of $501 million over the last four quarters. However, thanks to “restructuring charges and other,” Alcoa reported a non-GAAP $532 million profit for the time period.
According to Benzinga Pro, rough estimates show the majority of S&P 500 companies now use non-GAAP metrics in some capacity.
An American Accounting Association report claims that more than 60 percent of the companies in the S&P 500 were excluding GAAP expenses from their non-GAAP earnings as far back as 2001. Now, 16 years later, the SEC is on the case. Supposedly.
Disclosure: the author holds no position in the stocks mentioned.
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