SEC warns on pro-forma financial statements

The Securities and Exchange Commission has issued a strongly worded warning alerting investors of the dangers of relying on "pro forma" financials statements.

In a shot across the bows of many IT firms which highlight pro forma results when discussing quarterly figures, the SEC says that anything which departs from traditional accounting conventions has the potential to mislead investors.

"We believe it is appropriate to sound a warning about the presentation of company earnings and operating results on the basis of methodologies other than Generally Accepted Accounting Principles (GAAP)," a statement by the SEC said.

Heading the SEC's list of concerns is that because pro forma financial information isn't compiled using fixed rules, it makes it hard to compare a firm's performance between different time periods or against that of other companies. Pro forma financials should be viewed with "appropriate and healthy scepticism", the SEC said.

There is no prohibition preventing public companies from publishing interpretations of their results, and the SEC concedes that pro forma information can help direct investors' attention on important elements of financial results, such as results of core operations.

Nonetheless, the SEC is concerned that pro forma financial information, under certain circumstances, can mislead investors if it obscures GAAP results.

Because "pro forma" information is derived by selective editing of financial information compiled in accordance with traditional accounting conventions, firms "should be particularly mindful of their obligation not to mislead investors", the SEC advises. ®