March 21, 2016

2015 S&P 500 Pro Forma Earnings Trump GAAP by 25%

According to this recent WSJ article, 2015 reported earnings were 25% lower than pro forma results – the widest gap since 2008, when companies took a record amount of charges. S&P 500 EPS reportedly declined by 12.7% on a GAAP basis, compared to an increase of 0.4% on a pro forma basis.

Although the use of non-GAPP measures is not inherently wrong or bad (and in fact, used properly, can be integral to understanding a company’s period-over-period performance and future prospects), SEC Chair White and other regulators have recently communicated concerns about its misuse or potential to mislead notwithstanding compliance with the letter of the law. Just last week, Chair White reportedly reiterated the SEC’s scrutiny of this area – portending regulation that presumably would aim to curb perceived abuses or the potential to mislead without hampering the clarity that the use of non-GAAP measures can provide.

In December, Chair White cautioned corporate finance and Legal staff and audit committees to be more vigilant and thoughtful about the use non-GAAP measures in her keynote address at the 2015 AICPA conference:

Another financial reporting topic of shared interest and current conversation is the use of non-GAAP measures.  This area deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices.  Non-GAAP measures are allowed in order to convey information to investors that the issuer believes is relevant and useful in understanding its performance.  By some indications, such as analyst coverage and press commentary, non-GAAP measures are used extensively and, in some instances, may be a source of confusion.

Like every other issue of financial reporting, good practices in the use of non-GAAP measures begin with preparers.  While your chief financial officer and investor relations team may be quite enamored of non-GAAP measures as useful market communication devices, your finance and legal teams, along with your audit committees, should carefully attend to the use of these measures and consider questions such as:  Why are you using the non-GAAP measure, and how does it provide investors with useful information?  Are you giving non-GAAP measures no greater prominence than the GAAP measures, as required under the rules?  Are your explanations of how you are using the non-GAAP measures – and why they are useful for your investors – accurate and complete, drafted without boilerplate?  Are there appropriate controls over the calculation of non-GAAP measures?

And both SEC Commissioner Kara Stein and PCAOB Chair James Doty signaled their concerns about the use by  companies and investors of non-GAAP performance-related information in last week’s open meeting to consider the PCAOB’s proposed 2016 budget.

See my prior blogs on this topic:


Securities Class Actions Spike in 2015

4% of exchange listed companies were named in federal securities class action suits in 2015 – up from 3.6% in 2014 and 3.1% in 2013, and 11% more securities class action suits were filed in 2015 compared to the prior year. These are among the findings and trends identified in the most recent report – Securities Class Action Filings: 2015 Year in Review – from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

Additional noteworthy findings include:

  • The Consumer Non-Cyclical sector again had the most filings in 2015. This sector is predominantly composed of Biotechnology, Healthcare, and Pharmaceutical firms, which collectively totaled 43 filings.
  • Approximately 84% of the 2015 suits were largely based on Exchange Act Section 10(b) and Rule 10b-5. That percentage has been relatively consistent over the last three years. About 15% of the suits filed were based on Securities Act Section 11 – compared to 14% in 2014 and 9% in 2013.
  • Virtually all of the complaints filed in 2015 alleged misrepresentations in financial documents, which is largely consistent with prior years. About half of the complaints filed in 2015 alleged false forward-looking statements. Only about 11% of those actions were based on a restatement of the financial statements, while 35% alleged violations of GAAP.
  • Filings against companies in the Financial sector were well below historical averages, declining from 26 in 2014 to 17 in 2015. For the first time since 2006, there were no filings against banks.
  • IPO activity fell from 207 in 2014 to 117 in 2015, but remained above post dot-com bubble levels.

See this Stanford/Cornerstone release, and these summaries from Kevin LaCroix and Dorsey & Whitney’s Tom Gorman.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

Computershare & AST Occupy 63% of Transfer Agent Market
Survey: Financial Services Risk Management Practices
Cybersecurity: Reporting to the Board
Comprehensive Audit Committee Guide
(Re)configuring Parent & Spin-Off Boards

– by Randi Val Morrison