"The S&P Five" are General Electric Co, Exxon Mobil Corp, Microsoft Corp, Wal-Mart Stores Inc and Intel Corp. The Asian companies he used are China Mobile Ltd, Taiwan Semiconductor Manufacturing Co (台積電), Hutchison Whampoa Ltd, PetroChina Co, and Cheung Kong (Holdings) Ltd.
May, who is the founder and president of smartstockinvestor.com, an online newsletter, draws an important lesson from his work -- further elaborations of which he expects to complete shortly. "Pro forma accounting is essentially fictional financial reporting," he tells me from his base in Albuquerque, New Mexico, "and with its proliferation you are seeing that the gap between Asians and Americans is closing."
That's significant in itself, but there are other lessons to be added to this, it seems to me. Asians still have many decisions to make about their financial institutions and the best way to regulate them. And they are confirmed in their decision not to adopt GAAP simply because the Americans urge it around the world.
Hong Kong and Singapore have already chosen the EU's alternative system, known as International Accounting Standards, and there's a strong case for these judgments. IAS is based on general principles; auditors are required to understand the law and follow it in spirit.
GAAP, by contrast, is simply a set of rules listed one atop the other. As we can now see plainly, an auditor can follow the letter of them and still create a lot of trouble and mess. As many European auditors now assert, Enron might not be a household word today had the IAS system been applied in the US.
As to the matter of pro forma reporting, one hopes it is understood for what it is: a bad advertisement for self-regulation. Even the name is misleading, given that there is no form to pro forma. May quotes Lynn Turner, former chief accountant at the Securities & Exchange Commission, to describe pro forma practices as "everything but the bad stuff." The argument over global accounting standards has been running for some time and will continue to run for some time to come. Asians should pay close attention to it -- indeed, they should participate in it. They should take the current calamities in American accounting as symptomatic of larger problems with the American model, and they should decide for themselves just what they need by way of a suitable system.
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