The SEC is cracking down on made-up earnings numbers.
We crunched the numbers — it hasn't helped
Months after the SEC turned its focus to unaudited numbers in financial disclosures, their use is unabated.
In 2016, the Securities and Exchange Commission increased its
scrutiny of companies whose financial results use unaudited numbers that
can make their performance look better while making them difficult to
evaluate, potentially misleading investors.
The SEC issued new guidance on the use of so-called non-GAAP metrics, the home-made numbers that don’t conform to generally accepted accounting principles, in May. It created a task force to study them. And it began sending letters to, and demanding explanations from, hundreds of publicly traded companies — including well-known, widely held companies such as ConocoPhillips, Tesla and Berkshire Hathaway — it felt weren’t giving investors enough clear information about their performance.
Based on a MarketWatch analysis of new data, the SEC’s smackdown hasn’t done much good.
The SEC issued new guidance on the use of so-called non-GAAP metrics, the home-made numbers that don’t conform to generally accepted accounting principles, in May. It created a task force to study them. And it began sending letters to, and demanding explanations from, hundreds of publicly traded companies — including well-known, widely held companies such as ConocoPhillips, Tesla and Berkshire Hathaway — it felt weren’t giving investors enough clear information about their performance.
Based on a MarketWatch analysis of new data, the SEC’s smackdown hasn’t done much good.
The number of S&P 500 companies reporting non-GAAP EPS metrics has stayed about the same since May
* Refers to companies that did not have
earnings metrics recorded for the quarter described. This could be
because of an acquisition, merger or a company being delisted.
Source: Audit Analytics
At the end of the first (March) quarter in 2016, 359 companies
— more than 71% — in the S&P 500 had reported at least one non-GAAP
earnings per share number, according to a MarketWatch analysis of data
provided by Audit Analytics.
(Some companies report several, arguing that each one tells a vital story about their performance. For more on how these numbers create confusion, revisit our story on the misery earnings season can bring and our first-quarter graphic.)
By the end of the second quarter, after the SEC started sending comment letters to companies, that percentage remained the same. And it remained that way, at just under 72%, at the end of the third quarter, even after six months of comment letters from the SEC.
All told, about 71% of S&P 500 companies used non-GAAP EPS metrics in their earnings reports — numbers that often make it harder for investors to see a clear, consistent picture of the performance of the companies in which they invest.
The SEC’s pushback on these numbers seemingly hasn’t stemmed their use among large, widely held companies, our analysis found: It’s held steady — or, in some cases, even increased.
(Some companies report several, arguing that each one tells a vital story about their performance. For more on how these numbers create confusion, revisit our story on the misery earnings season can bring and our first-quarter graphic.)
By the end of the second quarter, after the SEC started sending comment letters to companies, that percentage remained the same. And it remained that way, at just under 72%, at the end of the third quarter, even after six months of comment letters from the SEC.
All told, about 71% of S&P 500 companies used non-GAAP EPS metrics in their earnings reports — numbers that often make it harder for investors to see a clear, consistent picture of the performance of the companies in which they invest.
The SEC’s pushback on these numbers seemingly hasn’t stemmed their use among large, widely held companies, our analysis found: It’s held steady — or, in some cases, even increased.
Even after SEC warnings, more companies added non-GAAP metrics than removed them
Source: Audit Analytics
Between the first and second quarters, when the SEC made it known
that it planned to watch the use of non-GAAP figures closely, more
companies removed at least one such metric from their earnings report
then added them, according to our analysis.
Kellogg Co., for example, gave investors four non-GAAP EPS metrics in the first quarter, but only two in the second and third quarters. Its first-quarter numbers included EPS figures that excluded restructuring charges, foreign exchange movements and the company's Venezuela operation, which had been hurt by currency controls.
But from the second quarter to the third, more companies added one or two more non-GAAP EPS metrics than reduced their use.
At the end of Q3, 26 S&P 500 companies reported two such numbers, up from 19 in Q1 — meaning that the number increased since the SEC increased its scrutiny and began reaching out to companies about their use of those numbers.
The new data also allowed us to study the use of non-GAAP metrics in various sectors more closely.
The Health Care and Information Technology sectors are the most prolific users of non-GAAP EPS metrics, with approximately 84% of companies using the alternative EPS numbers. Financial Services companies use non-GAAP metrics the least, at 46% or — less than half of those in the S&P 500.
The SEC did not respond to a request for comment. "After more than two quarters of SEC efforts, some companies still present non-GAAP metrics in a way that does not fully conform to the May 2016 Interpretations," said Olga Usvyatsky, vice president of research for Audit Analytics.
Ciara Linnane, Tomi Kilgore and David Marino-Nachison contributed to this article.
Kellogg Co., for example, gave investors four non-GAAP EPS metrics in the first quarter, but only two in the second and third quarters. Its first-quarter numbers included EPS figures that excluded restructuring charges, foreign exchange movements and the company's Venezuela operation, which had been hurt by currency controls.
But from the second quarter to the third, more companies added one or two more non-GAAP EPS metrics than reduced their use.
At the end of Q3, 26 S&P 500 companies reported two such numbers, up from 19 in Q1 — meaning that the number increased since the SEC increased its scrutiny and began reaching out to companies about their use of those numbers.
The new data also allowed us to study the use of non-GAAP metrics in various sectors more closely.
The Health Care and Information Technology sectors are the most prolific users of non-GAAP EPS metrics, with approximately 84% of companies using the alternative EPS numbers. Financial Services companies use non-GAAP metrics the least, at 46% or — less than half of those in the S&P 500.
The SEC did not respond to a request for comment. "After more than two quarters of SEC efforts, some companies still present non-GAAP metrics in a way that does not fully conform to the May 2016 Interpretations," said Olga Usvyatsky, vice president of research for Audit Analytics.
Ciara Linnane, Tomi Kilgore and David Marino-Nachison contributed to this article.
Search all S&P 500 companies
Search by company name to see how each company’s GAAP and
non-GAAP EPS compared during the 2016 3rd quarter. You can also go to
the company’s 1st and 2nd Q earnings release and see how each company
referred to its non-GAAP EPS number. In the case that a company reported
more than one non-GAAP EPS metric, all non-GAAP EPS metrics will be
displayed in that company’s row.
| Q3 | Q2 | Q1 | ||||
|---|---|---|---|---|---|---|
Company
|
GAAP
|
Non-GAAP
|
Spread
|
Filing
|
Filing
|
Metric name
|
| 3M CO (MMM) |
2.15
|
-
|
-
|
-
|
-
|
-
|
| ABBOTT LABORATORIES (ABT) |
0.83
|
|
|
Adjusted Diluted EPS from Continuing Operations
| ||
| ADOBE SYSTEMS INC (ADBE) |
0.10
|
|
|
Non-GAAP diluted net income per share
| ||
| ADT Corp (ADT) |
-
|
-
| ||||
| ADVANCE AUTO PARTS INC (AAP) |
0.20
|
|
|
Adjusted EPS
| ||
| AES CORP (AES) |
0.06
|
|
|
Adjusted EPS
| ||
| AETNA INC /PA/ (AET) |
0.37
|
|
|
operating earnings per share
| ||
| AFFILIATED MANAGERS GROUP, INC. (AMG) |
1.02
|
|
|
Economic earning per share
| ||
| AFLAC INC (AFL) |
0.29
|
|
|
Operating Diluted EPS
| ||
| AGILENT TECHNOLOGIES INC (A) |
0.21
|
|
|
Non-GAAP net income diluted EPS
| ||
*Spread is the difference between non-GAAP EPS and GAAP EPS.
Source: Audit Analytics
Methodology
Non-GAAP earnings data were provided to MarketWatch by Audit Analytics, which obtained it from company filings with the Securities and Exchange Commission.
Quarters are defined by the three months following the calendar quarter for which the company filed their earnings report. The first quarter represents company filings made between April 1 and June 30, the second quarter between July 1 and Sept. 30 and the third quarter between October 1 and Dec. 31.
A company may report more than one GAAP EPS metric. These include preliminary EPS metrics such as basic EPS, which is the amount of profit or loss per share available to common shareholders, or EPS from continuing operations, which does not account for the impact of discontinued operations.
A company's "bottom line" EPS is the fully diluted earnings per share calculated as if all convertible securities were exercised. Our analysis does not reflect all of the GAAP EPS metrics a company may have reported: If a company reported a non-GAAP EPS metric, we have reported the company’s corresponding GAAP metric, which may be a preliminary EPS number. If a company did not report a non-GAAP EPS metric, the GAAP EPS reported is the company's bottom-line EPS based on what the company tagged as such when reporting results to the SEC. If you believe you have spotted an error in the data, email Katie Marriner.
Quarters are defined by the three months following the calendar quarter for which the company filed their earnings report. The first quarter represents company filings made between April 1 and June 30, the second quarter between July 1 and Sept. 30 and the third quarter between October 1 and Dec. 31.
A company may report more than one GAAP EPS metric. These include preliminary EPS metrics such as basic EPS, which is the amount of profit or loss per share available to common shareholders, or EPS from continuing operations, which does not account for the impact of discontinued operations.
A company's "bottom line" EPS is the fully diluted earnings per share calculated as if all convertible securities were exercised. Our analysis does not reflect all of the GAAP EPS metrics a company may have reported: If a company reported a non-GAAP EPS metric, we have reported the company’s corresponding GAAP metric, which may be a preliminary EPS number. If a company did not report a non-GAAP EPS metric, the GAAP EPS reported is the company's bottom-line EPS based on what the company tagged as such when reporting results to the SEC. If you believe you have spotted an error in the data, email Katie Marriner.
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