Pro Forma Earnings: What's Wrong with GAAP?

5 Pages Posted: 18 Sep 2010 Last revised: 3 Sep 2013

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: August 20, 2010

Abstract

Reliable financial reporting is essential to the proper functioning of capital markets. Investors rely on reported financials to make investment decisions and to evaluate the performance of management and the company over time.

Recent years, however, have seen a proliferation of non-GAAP metrics to supplement official financial statements. Non-GAAP metrics exclude income and balance sheet items that are required under U.S. generally accepted accounting principles. Over half of all companies in the Dow Jones Index make such adjustments when reporting quarterly net income.

What does it say about the quality of the system that so many companies report non-GAAP earnings?

Are these adjustments being made for the benefit of shareholders, or to distort reported results?

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Keywords: GAAP, non-GAAP accounting, transparency, financial statements, financial reporting, corporate governance

JEL Classification: G30, G34

Suggested Citation

Larcker, David F. and Tayan, Brian, Pro Forma Earnings: What's Wrong with GAAP? (August 20, 2010). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-09. Available at SSRN: https://ssrn.com/abstract=1678066

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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