How to Hold Corporate Accounting Accountable

Tighter regulation needed to curb questionable practices.

The ongoing Securities and Exchange Commission (SEC) investigation of possible deceptive use of pro forma financial results by several companies should inspire little more than a sigh. Frankly, companies should be honest enough with themselves and their shareholders so the SEC isn’t forced to do all this baby-sitting. Fat chance.

Pro forma started as a method that companies used in addition to Generally Accepted Accounting Principals (GAAP) to report large, one-time charges such as merger and acquisition or restructuring expenses. The problem? A minority of companies started using the technique regularly to hide what was really happening with their finances. They also use pro forma to account for expenses that go beyond the typical one-time charge and apply it to costs such as taxes on stock options. The results are often wildly exaggerated but still legal. As a result, company press releases may trumpet a quarterly profit, for example, when a closer look unveils a whopping net loss.

An overall lack of accounting discipline is a big chunk of the problem. While the majority of companies aren’t abusing the rules, a lingering question is how corporate accounting can be more effectively regulated. At some point, and preferably sooner than later, there should be sterner measures taken to protect investors.

Unfortunately, the best people to do this are often the offending companies. One measure could be to hit the corporate accounting magicians where it hurts–with big fines. That should help cut the babysitters’ hours.

Posted by on June 21, 2001