Pro Forma Earnings: What's Wrong with GAAP?
5 Pages Posted: 18 Sep 2010 Last revised: 3 Sep 2013
Date Written: August 20, 2010
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: Suggested Citation