Fantasy accounting: how the biggest companies in America turn real losses into paper profits

Lax enforcement from the SEC has allowed the biggest companies in America — 90 percent of the companies in the S&P 500, led by the faltering energy sector — to ignore the "Generally Accepted Accounting Principles" (GAAP) in presenting their financial information to investors, manufacturing nonexistent profits in quarters where they suffer punishing losses.

The result: in 2015, a year in which a representative group of companies saw net their income decline by 6%, they declared gains of 11%. 30 of those companies — mostly in the energy sector — turned actual losses into profits on their statements.

There are rules against this kind of "pro-forma" reproting, but the SEC has stopped enforcing them.

Creativity abounds in today's freewheeling accounting world. And the study found that almost 10 percent of the companies in the S.&P. 500 that used made-up figures took out expenses that fell into a category known as "other." These include expenses for a data breach (Home Depot), dividends on preferred stock (Frontier Communications) and severance (H&R Block).

But these are actual costs, notes Jack T. Ciesielski, publisher of The Analyst's Accounting Observer. "Selectively ignoring facts can lead to investor carelessness in evaluating a company's performance and lead to sloppy investment decisions," he wrote. More important, he added, when investors ignore costs related to acquisitions or stock-based compensation, they are "giving managers a free pass on their effectiveness in managing all shareholder resources."

Fantasy Math Is Helping Companies Spin Losses Into Profits
[Gretchen Morgenson/NYT]

(via Naked Capitalism)

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