SEC Complains of 'Smoke and Mirrors' Reporting

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SEC Commissioner Isaac Hunt, speaking last Friday before the Schools of Accountancy at its annual meeting in Arlington, Virginia, complained that federal regulators continue to see companies engaging in what he called smoke-and-mirror accounting practices that inflate earnings and stock prices.

The SEC "has recently noticed certain worrisome trends relating to the integrity of financial information," stated Mr. Hunt. Citing the volatile swings in the stock market which have increased the pressure on companies to meet past or projected earnings levels, Mr. Hunt described a process of manipulation of numbers on financial reports and the growing use of unaudited financial statements, also known as pro forma statements.

"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," Mr. Hunt stated. "Even more disturbing is that pro forma earnings may be materially misleading to reasonable investors, violating the federal securities laws."

The SEC has called for companies to release audited and unaudited statements simultaneously, which would provide investors with an opportunity to make valid comparisons.

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