Sun, Apr 27, 2003 page11

• Companies may start to hide data

  • By Floyd Norris / NY TIMES NEWS SERVICE
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  Be careful what you ask for. You might get it.

  During the bubble years, far too many companies came to define earnings the way they wanted to, sometimes changing the definition from quarter to quarter.

  Analysts dutifully began to estimate the pro forma numbers, if only because those were the numbers for which the company provided estimates. And those were the numbers that too many journalists emphasized as they reported whether companies had met expectations. Companies that were actually losing money were able to report rising (pro forma) earnings per share.

  Such pro-forma numbers often amounted to "EBBT," or "earnings before bad things," as David Tweedie, the chairman of the International Accounting Standards Board, put it.

  I used to fantasize about applying pro-forma earnings to my personal life. I figured I would calculate my earnings figure excluding investments (the mortgage payment) and assorted nonrecurring expenses (neatly consolidated on my Visa bill).

  By that measure, I was doing very well.

  Unfortunately, it was not only investors who came to think such numbers were real. Companies often wrote bonus checks and spent money as if the write-offs that were conveniently excluded from pro forma earnings did not count, thereby leaving themselves in far worse shape than they would have been had they paid attention to the income figure that they did their best to play down in earnings releases -- the one computed according to those tiresome "generally accepted accounting principles."

  After the bubble burst, there was revulsion, and in due course the Securities and Exchange Commission enacted some rules.

  Now pro-forma numbers must be reconciled to GAAP numbers so that investors can figure out where the numbers came from. Companies may not treat a category of expense as nonrecurring if in fact it keeps recurring.

  If your company takes a restructuring charge every year, maybe it is not an abnormal item.

  The first-quarter profit reports now coming out are the first under the new rules, and the good news is that fewer companies are pushing pro-forma profits. But the bad news is that some are overreacting to the new rules. AOL Time Warner, in putting out its earnings this week, warned that because of the rules, its financial results "have not been adjusted for items that may affect their comparability, including items like merger and restructuring charges."

  Alan Beller, the director of corporation finance for the SEC, wouldn't discuss AOL when I called him.

  But he said there was nothing to keep companies from disclosing information they thought investors could use, although in some cases they may need to explain why the information is relevant.

  "They can certainly identify the restructuring charge," he said of companies that have a history of such charges. There is nothing, he added, "in the new rules which would prevent or preclude an issuer from giving comparable prior-year information to whatever they are giving this year."

  For this quarter, AOL seems to have explained its numbers, despite its warning. But there is a risk, as Carole Levenson of Gimme Credit noted, that companies might use the SEC rules to change the information they provide so that it could "become difficult to make any kind of meaningful historical comparison."

  The sin of pro-forma numbers was that companies used them to obscure reality. But no one number -- GAAP or otherwise -- is enough. It would be tragic if companies retreated to using GAAP numbers without explaining details of their varied businesses. Don't trust any company that clams up and blames the SEC.
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