SEC still seeing smoke and mirrors accounting: Hunt
WASHINGTON, Oct 27: Federal regulators continue to see companies engaging in “smoke-and-mirror” accounting tactics to boost earnings and stock prices, a Securities and Exchange Commission official said on Friday.
Despite a well-publicized crackdown on accounting fraud begun several years ago, the SEC has recently noticed certain worrisome trends relating to the integrity of financial information, Commissioner Isaac Hunt said in a speech.
Volatile stock market gyrations have increased the pressure on companies to meet past or projected earnings levels, he said.
As a result, some managers have engaged in manipulation or ‘smoke and mirrors’ to enhance their companies’ earnings and, in turn, the companies’ share prices,” Hunt told the Federation of Schools of Accountancy at its annual meeting in Arlington, Virginia.
When such chicanery is discovered, the resulting and inevitable restatements of earnings have caused investors to lose billions of dollars and confidence in the market, Hunt added.
He also said that corporate management’s growing use of unaudited financial statements, otherwise known as “pro forma” earnings, may be confusing to investors who might not understand the difference between pro forma numbers and audited financial statements.
Companies usually issue pro forma earnings, which almost always paint a rosy picture of financial muscularity, well ahead of their quarterly SEC filings, which have to be examined by an auditor and may not paint such a cheery picture.
Even more disturbing, Hunt said, is that pro forma earnings may be materially misleading to reasonable investors, violating the federal securities laws.
There have been calls for companies to release audited and unaudited statements simultaneously, giving investors an opportunity to make side-by-side comparisons.
When dealing with financial statements, pragmatism or reality over fantasy is preferred, Hunt added.
His comments echoed a speech by SEC Chairman Harvey Pitt earlier this week decrying the trend toward pro forma numbers.
Unstructured and undisciplined, this form of financial disclosure starts by rejecting the bedrock of all our financial disclosure requirements Generally Accepted Accounting Principles, the SEC chief said.—Reuters
