NASDAQ 100 Turn Big Losses Into Pro Forma Profits

In a study described as a “sad commentary on the state of financial reporting in the United States,” SmartStockInvestor.com analyzed the earnings (or losses) of the top 100 companies on the technology-heavy NASDAQ Exchange for the first three quarters of 2001.

The study found the use of pro forma reporting turned combined losses of $82 billion for these companies under generally accepted accounting principles (GAAP) into combined profits of $19.1 billion. Just as startling, four of the five largest NASDAQ companies (by market capitalization) had combined profits under both bases. But their pro forma earnings were nearly five times their GAAP earnings.

Effects on Ratio Analysis

The author, John J. May, explains that pro forma earnings are used to calculate the earnings per share (EPS) and price earnings (PE) ratios reported by popular online services, such as Thomson Financial/First Call and Yahoo Finance. In defense of pro forma earnings, he notes that a full year 2001 PE ratio based on GAAP earnings would probably be meaningless since full year results are likely to be negative (losses) rather than positive. But, the downside is the unexpected surprises often referred to as the bursting of the bubble. While pro forma earnings helped buoy stocks in the short term, Mr. May says, the “deceptions” ended badly.

Waiting for the SEC

“Sooner or later,” says the author and head of SmartStockInvestor.com, “the Securities and Exchange Commission (SEC) will be forced to fulfill its mission of preserving the integrity of financial reporting in this country and investors will be amazed at how much they’ve been duped in recent years.” Mr. May is a CPA/MBA and a former Big Five auditor.

-Rosemary Schlank

You may like these other stories...

A proposal issued by the Governmental Accounting Standards Board (GASB) last week explains how fair value measurement should be defined for state and local government financial reporting.The exposure draft, Fair Value...
By Jason Bramwell The board of trustees of the Financial Accounting Foundation (FAF) finalized a new policy on November 19 that provides the Governmental Accounting Standards Board (GASB) with direction on what...
By Jason Bramwell The Governmental Accounting Standards Board (GASB) is now offering a free online toolkit designed to assist preparers and auditors of state and local government pension plans with implementing new...

Already a member? log in here.

Upcoming CPE Webinars

Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 10
Transfer your knowledge and experience to prepare your team for the challenges and opportunities of an accounting career.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.