FYI: When corporations resort to this sort of non-GAAP bullshit, it's safe to assume that they're lying to you. The "good news" that they're claiming to present to you won't be nearly as good as they're claiming, and there will be significant "bad news" that they're trying to gloss over in the process. Non-GAAP is lying with statistics, every single goddamn time. The question isn't, "are they lying?" The question is, "what, exactly, is the lie?"I stand by this, by the way, but it still falls pretty far short of actually explaining what non-GAAP is, or exactly why it's so potentially damaging. The reason for this is simple: I am not an economist. I might understand in the broadest general terms why Generally Accepted Accounting Principles are important, and why corporations routinely circumventing them to present a distorted impression of their financial health would be double-plus-ungood, but I don't have sufficient economic chops to really explain it all properly... at least, not in a way that I'd be satisfied with.
Enter CBC News:
More than 85 per cent of the information disclosed by public companies and used by investors to decide where to put their money hasn't been independently audited, posing a risk to investments and retirement savings.
It's a practice that can mislead investors by letting companies overstate their earning potential and push their share prices higher. That sounds good — until the music stops and the stock price falls.
The problem is serious enough that Canadian regulators plan to raise it with their international peers at a conference in Toronto Nov. 1-2.
Company financial statements are externally audited using internationally approved practices. But many companies provide additional unaudited disclosures, according to institutional investors at a recent industry conference.
These disclosures regularly show more favourable results and trends, according to a global survey by the Chartered Financial Analyst (CFA) Institute of its 145,000 members in 2016.
And investors are placing their bets using that unaudited information.
The implosion in the price of Valeant Pharmaceuticals, from a high of $335.32 a share on July 31, 2015 in Toronto trading to a low of $11.20 a share in April, is a stark example of what can go wrong for investors. [...] At its peak, Valeant traded at a seemingly reasonable 22 times its "adjusted earnings" per share, in line with the overall S&P 500 market multiple of 24 times.
But this market measure is based on generally accepted accounting principles (GAAP) earnings for the companies in the S&P500 Index. On that same basis, Valeant was actually trading at an astonishing 440 times earnings.
According to Richard Talbot, former director of research for RBC Capital Markets and board member of the CFA Institute of Toronto (the second largest chapter in the world), to make non-GAAP information effective, consistent definitions and standards need to be applied:Non-GAAP disclosures are lies; carefully crafted to obscure inconvenient facts, and present a rosier-than-reality picture of a company's health, in order to dupe unwitting investors into buoying up the share price of a company, and thus its executives' bonuses and stock options, beyond what is actually justified by that company's performance. Non-GAAP reporting makes comparisons impossible, which means that informed buying decisions cannot be made by potential investors; and the utter inadequacy of GAAP-compliant filings, which are generally as limited and inscrutable as the letter of the law allows, makes the problem worse, since non-GAAP reports are the only information that most investors have access to.
"The first two are a must," he said. "The third would be a nice-to-have."
- By a company across all reporting periods.
- Across all companies within an industry.
- Across all industries.
The fixes outlined by Talbot would severely restrict non-GAAP reporting, bringing the financial "reports" issued by publicly-traded corporations into compliance with generally accepted accounting principles in a way that makes meaningful comparisons possible: whether across multiple reporting periods for a single company, or between a company and its competitors in a single industry, or (ideally) even between potential investment opportunities in different industries. It would make lying with statistics more difficult, allowing investors to make informed choices, without requiring them to be experts in both forensic accounting, and the industry in question. Right now, none of that is happening.
Of course, establishing standards for non-GAAP public disclosures is only the first step; they must also be monitored, and enforced by regulators, something which seems unlikely to happen in the U.S. under the Trump administration. Still, the CBC piece discusses the efforts that are underway to achieve this in some detail, before closing with this:
Consistency of regulatory approach across countries is critical, not only for investors, but especially for companies whose shares are listed on multiple exchanges and must meet multiple local reporting requirements.
A key opportunity for Canada to advance global co-ordination on this topic is the upcoming International Financial Reporting Standards (IFRS) annual conference Nov. 1-2 in Toronto.
[Linda Mezon, chair of the Canadian Accounting Standards Board] has secured a rare joint appearance by both the chair of the International Accounting Standards Board and the chair of the Financial Accounting Standards Board in the U.S., which has a different, and sometimes conflicting, approach to accounting from the rest of the world.
They will join her in a roundtable discussion during which she intends to raise the issue of non-GAAP measures.
"We need to solve this together," said Mezon.Fingers crossed, people. Think good thoughts for Linda Mezon.
