Market Overview

SEC To Wall Street: No More Non-GAAP Accounting... For Real This Time

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.”

Related Link: Tesla Jumped 4% After Earnings Last Night, But Is Now Plummeting Off No Real News

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.

Posted-In: News Legal SEC Best of Benzinga


Related Articles (AA)

View Comments and Join the Discussion!