Pro forma accounting versus GAAP accounting

In the wake of Enron (and the search engine did not help) I’m working on a group project about pro forma accounting methods, and frankly, the net has not been that much help.

Pro forma is very popular with tech companies, and usually leaves out extradordinary items and one time charges to try and give the investor a better look at how the “core” business is doing.

I am looking for the following info:

  1. How did pro-forma originate?
  2. Are there any set guidelines for it’s use?
  3. The SEC has been bashing pro-forma methods. What are the pros of reporting pro-forma methods?

Any links would be appreciated. Vinnie

First of all, what’s the debate? Doesn’t this belong in another forum?

Second, it’s considered bad form to ask The Dopers to do your homeowrk for you.

Third, lay off the virgin killing… I’ve been wondering where they were all going.

homework* ( I swear I previewed )

IIRC, pro forma came about because companies wanted to show core business. instead of growth in sales, a company would should same store sales y/y. That would then be an incomplete picture of total sales, but provide a good basis for comparison on how the core business is doing. So, the pros for proforma is that the company provides additional timely information about it’s performance. The con is that the company can basicially lie and stretch the truth to say whatever they want to say.

Then companies started issuing pro forma at times when not required to provide qualified financial statements. For example, on a monthly basis when qualified financial statements are issued on a quarterly basis. Also, companies started issuing pro forma statements at the end of the quarter, with the qualified statements coming later after going through the qualification process. There is a several month lag for major corporations between the end of the fiscal year, and when the annual report becomes available. They may opt to issue pro forma statements in the interim.

Companies found that investors and the investment banks were receptive to pro forma statements. Then the companies started getting quite fanciful. Especially during the internet bubble. Just maybe there were stock options tied into the share price that were directly affected by those proforma statements. Just maybe companies were trying to raise additional capital on the basis of proforma statements.

AFAIK, there are no official guidelines. The official guidelines are FASB and GAAP for accounting standards, not for pro forma.

Since it is homework, I remember that Frank Partnoy in his book FIASCO talks some about proforma. You can also search on www.bloomberg.com through the columnists. I’ve seen plenty of past columns on this issue.