Keywords

Non-GAAP earnings, pro forma reporting, financial disclosure regulation

Abstract

When companies announce their quarterly results, along with their standard GAAP earnings number, managers sometimes choose to disclose an adjusted (pro forma) earnings figure that excludes one or more income statement line items from net income. While managers frequently argue that they exclude transitory items from GAAP income in an effort to better reflect core operating performance, regulators and critics of pro forma reporting contend that these exclusions can overstate operating results. In particular, the Securities and Exchange Commission (SEC) issued a warning that under certain circumstances, pro forma reporting “can mislead investors if it obscures GAAP results” (SEC 2001). The Sarbanes-Oxley Act of 2002 (SOX) and Regulation G (2003) placed strict limitations on non-GAAP reporting. Thus, some researchers concluded that regulation would result in a decline in non-GAAP reporting (Heflin and Hsu 2008). However, the frequency of pro forma earnings disclosures has continued to increase in the post-SOX environment (Brown, Christensen, Elliott, and Mergenthaler 2012b). In January 2010, the SEC stated that it will inquire about significant differences between what firms disclose in their SEC filings and what they disclose in press releases (PwC 2010). Finally, the SEC’s chief accountant of the Enforcement Division, Howard Scheck, recently emphasized that non-GAAP metrics are a “fraud risk factor” (Leone 2010). Thus, regulators are still actively concerned about whether pro forma reporting is misleading to investors.

Original Publication Citation

Christensen, T.E., Drake, M.S. and Thornock, J.R. (2014), Optimistic Reporting and Pessimistic Investing: Do Pro Forma Earnings Disclosures Attract Short Sellers? Contemp Account Res, 31: 67-102. https://doi.org/10.1111/1911-3846.12009

Document Type

Peer-Reviewed Article

Publication Date

2014

Publisher

Contemporary Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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