doug henwood kindly drew the following to my attention ------------------- Sunday November 11, 12:16 pm Eastern Time Wall Street takes aim at accounting tricks By Deepa Babington NEW YORK, Nov 11 (Reuters) - Wall Street is starting to refuse to bite the bait on dubious earnings numbers highlighted by corporations in press releases. Companies tout profit figures, frequently called pro forma results, that strip out unseemly one-time charges and expenses at record levels -- more than $200 billion this year alone. Investors, analysts, and accountants are revolting, and pressure is building to do away with the medley of different profit numbers or at least cut down on it. Standard & Poor's, a major compiler of earnings and other financial data, now will treat restructuring charges, stock option expenses, and write-downs from ongoing operations as part of a company's operating earnings -- items that many companies exclude from their version of operating earnings. ``In the past, S&P would take a company's special charges at their word,'' said S&P analyst Robert Friedman, who was involved in the project. ``But now we're going to say, 'Hey, wait a minute.''' The decision underscores the momentum building on Wall Street to scrutinize corporate accounting. One recent high-profile victim of this movement was Enron Corp. (NYSE:ENE - news) The energy trading company faced a crisis in investor confidence after it became clear it had boosted profits and racked up debt through complex financial transactions known as off-balance sheet deals. The deals, which were structured so they wouldn't show up on Enron's balance sheet, caused Enron to chop almost $600 million off earnings for the last four years. The once-mighty company lost $20 billion in market value, and on Friday agreed to be bought by smaller rival Dynegy Inc. (NYSE:DYN - news) Investors are scared of such stock market casualties. That's partly why they want to crack down on pro-forma numbers, which often present a much rosier picture of a company's performance because they exclude a whole bevy of costs that drag down the bottom line. ``Hopefully, this will put pressure on companies to think twice when they put out their financials,'' said Friedman. Tech companies, in particular, conveniently have stripped out everything from inventory write-downs to severance costs from their bottom-line figures and pressured analysts to do the same with their earnings estimates. Mobile phone maker Motorola Inc. (NYSE:MOT - news), for example, reported a third-quarter pro forma loss of $153 million early last month. After including charges for investment impairments, cost reduction activities and additional reserves for its financing of a Turkish cellular operator, however, the company posted a whopping $1.4 billion loss. A Motorola spokesman was not available for comment. The practice has also made it difficult for analysts and investors to compare the results of one company against its peers as each comes up with its own ideas of what should be included in pro forma earnings. ``There are so many variants of pro forma that it can cloud comparisons,'' said David Zion, an accounting analyst at Bear Stearns. The proliferation of these reports has also caught the attention of the nation's accounting rule makers, even though they don't have the authority to police press releases. The Financial Accounting Standards Board (FASB) two weeks ago said it is pressing ahead with a project that will look at how some closely watched items such as pension fund income should be classified and presented in financial statements. Corporate America was not enthused by the idea and several corporations wrote to the accounting body urging it not to go ahead with the plan, said the project's senior manager, Ronald Bossio. But fund managers and investors are applauding. In a survey of 223 portfolio managers by capital markets firm Broadgate Consultants, nine out of 10 stock pickers said companies need to improve how they report results. FASB needs to come up with one key indicator of financial performance, and companies should abide by it, they basically said. If the accounting rule-making body accepted EBITDA, or earnings before interest, taxes, depreciation and amortization, as a key measure, companies ought to calculate it in a consistent manner and display it as a separate item on their statements, almost all managers agreed. ``I think that pro forma thing is just a way to get around Generally Accepted Accounting Principles,'' said Debra McNeill, a portfolio manager at Fremont Investment Advisors. "I think there needs to be some guidelines to be set out on pro forma numbers, but it does not necessarily need to be banned.
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