SEC issues hi-tech warning

The watchdog has issued cautionary advice that companies and investors should view ‘pro forma’ financial statements ‘with appropriate and healthy scepticism’.

A slew of hi-tech companies have opted to release financial statements using pro forma numbers instead of using GAAP, as the former usually paints a rosier picture of a company’s performance.

Pro forma proponents range from market leaders like Cisco to companies such as Amazon, which has yet to make any profit.

The SEC said that pro forma numbers are useful, but potentially misleading if used alone. It also issued an Investor Alert that describes how pro forma financials should be analysed.

‘Because pro forma financial information by its very nature departs from traditional accounting conventions, its use can make it hard for investors to compare an issuer’s financial information with other reporting periods and with other companies,’ the SEC said.

The regulator added that the anti-fraud provisions of the federal securities laws apply to a company issuing pro forma financial information.

According to the SEC, because pro forma information is derived by selected editing of financial reports compiled in accordance with GAAP, companies should be particularly mindful of their obligation not to mislead investors when using this information.

Financial Executives International and the National Investor Relations Institute have jointly developed the guidelines on pro forma reporting.

Louis Thompson, chief executive at the NIRI, said: ‘We think the SEC has struck the right chord in dealing with pro forma reporting.’

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