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Journal of Undergraduate Research

Keywords

pro forma earnings, restatements, GAAP, EPS, earnings per share

College

Marriott School of Management

Department

Accountancy

Abstract

In recent years, companies have increasingly released financial performance numbers in addition to those required under generally accepted accounting principles (“GAAP”). These adjusted, or pro-forma earnings, have been a way for management to report earnings without extraordinary, one-time, or other items. Previous research suggests that management may use these pro-forma numbers to meet benchmarks such as analysts’ expectations when GAAP measurements fall short of these expectations.1 In addition, there are companies which – due to misstatements resulting from accounting errors or even fraud – are required to restate their earnings. These companies may have reported inflated earnings to reach benchmarks, only to restate earnings later. It is hard to tell the difference between “the good guys” and “the bad guys” that report pro forma earnings. The purpose of my research is to see if companies that also have restatements help to isolate managers with opportunistic reasons for reporting pro forma earnings. This is why I look at the “overlap” firms with both restatements and pro-forma numbers. So, I investigate whether companies with two strikes against them (restatements and pro-forma earnings) are worse than companies with only one strike against them.

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