By Jon Grant
There is an increasing tendency for listed companies to present what they consider to be ‘normalised’ results alongside ‘actual’ results.
The possible misuse of pro forma financial information is the subject of concern and, in the US, the SEC has just introduced a new disclosure regulation.
This new regulation requires public companies that disclose or release ‘non-GAAP financial measures’ to include a presentation of the most directly comparable GAAP financial measure and a reconciliation of the non-GAAP figures.
Last week the APB wrote to audit firms with listed company clients to alert them to the possibility that shareholders may sometimes be misinformed by the manner in which pro forma financial information is included in unaudited interim and annual results. The APB emphasised the need for auditors to consider the way in which pro forma information is presented in preliminary announcements before agreeing to their release.
The APB recognises that in many circumstances, the presentation of pro forma results alongside the statutory results may help shareholders better understand the financial performance of a company. But it is concerned that in other instances, such information has the potential to be misleading especially when it is given greater prominence than the statutory numbers, when there is no explanation of its purpose and when the adjusted numbers are not reconciled to the statutory figures.
Neither interim statements nor preliminary announcements are required to be audited documents. But listing rule 12.40 requires the company to agree the preliminary statement with the auditors before it is notified to a regulatory information service.
If the auditors are not satisfied with the way information has been included in a preliminary announcement they should consider whether it is appropriate for them to consent to the release of the announcement.
- Jon Grant is executive director at the Auditing Practices Board
Not just the auditor’s concern
By Peter Williams
The words pro forma are becoming common in UK financial reporting parlance. Too many companies are putting out figures at the crucial preliminary announcement stage which are as much a product of the PR office as they are of the finance department.
With the peak period for results announcements upon us, the APB is right to have issued auditors with a timely reminder that pro formas need to be treated with great care. Especially as its working party hasn’t yet managed to produce updated guidance.
The rules of the UK listing authority require that prelims be ‘agreed’ by the auditors. It is this agreement which gives pro formas an authority which frankly they sometimes just don’t deserve.
Auditors can’t stop companies putting out pro forma results – although no doubt many of them would like that to happen. Instead, auditors are being reminded that they should ensure companies give equal prominence to the real figures – you know those audited ones that are so often tucked away near the back of the prelim announcement and will go into the annual report and accounts – as they do to the pro forma ones which are in big type on page one of the press handout.
At the moment, it appears that practice among UK listed companies is extremely variable. Some pro formas genuinely help investors understand the real financial performance and some companies are careful to ensure the figures in the pro formas are reconciled to the audited figures. But not all quoted companies go to such trouble.
To deal with the current fashion for the pro forma, any sensible firm will be sending out a reminder to their partners to ensure they are not aiding quoted companies in sending out results which are at best optimistic, and at worst, plain misleading.
The APB has done investors a service in stiffening the resolve of the auditors, but the responsibility is not that of the auditor alone. This is one area where you would expect auditors to be having free and frank discussions not only with the finance director but, if necessary, with the rest of the board as well.
- Peter Williams is a freelance journalist.
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