U.S. companies turned to an old habit during the 2020 pandemic, according to a recent report from financial data provider Calcbench.
Just a few years after a Securities and Exchange Commission crackdown on the overuse of nonstandard accounting metrics, companies in the S&P 500 resumed the practice in droves, the report found.
Calcbench took a close look at S&P 500 companies’ use of both GAAP and non-GAAP numbers in 2020, with GAAP referring to Generally Accepted Accounting Principles, the U.S. standard.
The company measured the difference between net income, in dollar terms, for the 60 companies with the biggest difference between GAAP and non-GAAP metrics. It found that the group’s non-GAAP net income exceeded GAAP net income by $132.2 billion — and that was more than double the reported GAAP net income of $130.7 billion.
“How can anyone say with a straight face that non-GAAP numbers more accurately represent public company earnings?” asked Francine McKenna, an accounting expert and adjunct professor of international business at American University. (McKenna is also a former MarketWatch reporter.)
“They’re now more than double the numbers, according to GAAP accounting standards. They often change losses to fake profits. No wonder the stock market is barely aligned with fundamentals,” she said. “New SEC Chairman Gary Gensler has a big job ahead trying to bring financial reporting back to reality.”
The SEC issued new guidelines for corporate reporting in 2016 in an effort to slow the proliferation of non-GAAP numbers and rein in the worst offenders. The SEC allows companies to use non-GAAP numbers to supplement their reporting, but they must give equal or greater prominence to GAAP numbers and explain how the two are reconciled.
Those guidelines came after 90% of S&P 500 companies reported non-GAAP numbers in 2015, up from about 70% in 2009. The spread between the two had also widened significantly. Non-GAAP earnings per share were higher than GAAP earnings per share by an average of 25% in 2015, compared with a variance of just 6% in 2013.
“Companies will use whichever accounting practices make them look the best and benefit their CEOs the most,” said Rosanna Landis Weaver, a program manager for CEO-pay issues at As You Sow, a nonprofit that promotes corporate social responsibility. “This seems a fundamental contradiction with the idea of accounting.”
The sample group of 60 companies made more than 240 adjustments to GAAP net income, according to Calcbench. The single biggest category of adjustment was amortization of intangibles, which accounted for 30% of all adjustments.
The next biggest category was “other,” which accounted for 22% of adjustments. Calcbench found that three-fourths of the adjustments in that category were undertaken by four companies: Drug wholesaler AmeriscourceBergen
and healthcare company AbbVie Inc.
both had contingent considerations of more than $5 billion each; United Parcel Services Inc.
had an almost $5 billion mark-to-market loss on its defined-benefit plan; and energy company Hess Corp.
had $2.1 billion in exploration costs.