Five earnings seasons ago, the Securities and Exchange Commission told publicly traded companies how they should be explaining their financial results so investors can better understand them. With hundreds of companies releasing their quarterly results in the weeks ahead, the SEC has sent a reminder.
In the world of corporate accounting, this is Wall Street’s watchdog barking.
In May 2016, the agency updated its guidance regarding unconventional accounting. In the language of the financial-industrial complex, this is called non-GAAP accounting. GAAP stands for generally acceptable accounting principles. Those principles are designed to have companies’ finances adhere to the same standards. That allows investors to compare the financial records of different companies. GAAP is supposed to be a common measuring stick.
But companies aren’t shy about presenting a different appraisal of their performance, thus the concept of non-GAAP accounting. One company may eliminate borrowing costs from its non-GAAP profit statement. A second may ignore the taxes it pays. A third may decide to use the “alternative accounting” without ever telling investors.
Successful long-term investors know the value of diversification. That diversification should not be reflected in the accounting. Companies that willfully or wantonly ignore the SEC’s direction ultimately are putting their short-term profits ahead of long-term growth. They also are unnecessarily creating reputational risk that will cost shareholders if and when the SEC decides to do more than remind them of how to report financial results.