SEC Accounting Scrutiny Could End Bull Market

SEC Accounting Scrutiny Could End Bull Market

$DIA, $SPY, $QQQ, $VXX

The SEC appears to be ready to put a end to aggressive accounting methods.

The US Securities and Exchange Commission is finally setting out to put a stop to the accounting methods that artificially inflates profits.

According to media reports, the SEC is getting ready to step up its scrutiny of companies’ “homegrown earnings measures,” signaling it plans to target firms that “inflate their sales results and employ customized metrics that stray too far from accounting rules.”

Pro Forma Earnings Vs GAAP

Pro Forma earnings are when you adjust for unusual, non-recurring, one-time expenses.

Examples, as follows:

1. Minus or “ex” one-time costs of layoffs
2. Minus or “ex” one-time costs of an asset write-down
3. Minus or “ex” one-time costs associated with a takeover
4. Minus or “ex” one-time costs of currency losses

Corporate America’s creative use of Pro Forma accounting rules has made them appear more prosperous than they really are, that is because the use of “extraordinary items” and “non-cash charges” has turned corporate earnings reports into misrepresentation that the majority of retail (non-professional) participants do not understand.

The SEC is waking up to the misleading picture that pro forma earnings, compared to generally accepted accounting principles, or GAAP generate. The commission has launched a campaign to crack down on “made-to-order” earnings.

Earlier this week, Chief Accountant of the SEC’s corporation finance division, said, “The point is, now the company has created a measure that no longer reflects its business model. We’re going to take exception to that practice.”

The Big Q: What will the SEC do?

The Big A: According to the Dow Jones article: The agency plans to issue comment letters in the coming months that critique firms that booked revenue on an accelerated basis. Mr. Kronforst, who plans to speak Thursday at a Northwestern University legal conference about the issue, declined to name them.

The regulators plan to challenge companies that report their adjusted earnings on a per-share basis. The results are often higher than per-share GAAP earnings and look too much like measures of cash flow, which decades-old rules prevent from being presented on a per-share basis. That is because investors could confuse cash flow with actual earnings, which truly represent the amounts that could be distributed to investors.

“We are going to look harder at the substance of what companies are presenting, rather than what the measures are called,” he said.

To see the impact of such a crackdown, all you have to do is take a look at the growing difference between GAAP profits and pro forma profits.

The new SEC scrutiny could be just the thing that ends this long running Bull market.

Wednesday’s US major stock market indexes finished at: DJIA +145.46 at 17851.51, NAS Comp +33.84 at 4894.89, S&P 500 +14.48 at 2090.54

Volume: Trade was below average on the NYSE with 891-M/shares exchanging hands.

• DJIA +2.5% YTD
• S&P 500 +2.3% YTD
• Russell 2000 +0.4% YTD
• NAS Comp-2.3% YTD

Stay tuned…

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